China: A strong start to the year – Standard Chartered

The analysis team at Standard Chartered points out that Chinese GDP growth accelerated to 6.9% y/y in Q1-2017 from 6.8% in Q4-2016, beating expectations.

Key Quotes

“In nominal terms, GDP expanded 11.8% y/y, the highest growth rate since Q1-2012. The GDP deflator rose to 4.6% y/y mainly on a surge in the PPI, from deflation of 4.8% y/y in Q1-2016 to inflation of 7.4% y/y in Q1-2017. The services sector grew 7.7% y/y in Q1, making up 56.5% of GDP and contributing more than 4ppt to the growth rate.”

“Real activity improved across the board in March:

• IP growth (in real terms) accelerated to 7.6% y/y in March from 6.3% y/y in January-February, the highest monthly growth since the beginning of 2015. The result is consistent with the strong manufacturing PMI readings in recent months. According to the National Bureau of Statistics (NBS), high-tech and machinery IP surged 13.4% y/y and 12.0% y/y in Q1, indicating a better production profile.
• FAI growth (in nominal terms) accelerated to 9.5% y/y in March from 8.9% y/y in January-February due in large part to higher prices. Private investment growth – closely correlated with manufacturing investment – quickened, likely reflecting better profitability and optimism about the growth outlook. Infrastructure investment growth remained strong at over 20% y/y on higher land sales revenue and the frontloading of fiscal spending. In particular, property investment accelerated to 9.4% y/y in March, despite recent tightening measures on home purchases and mortgages, possibly due to the lagging effect.
• Retail sales (in nominal terms) accelerated to 10.9% y/y in March from 9.5% y/y in January-February. Retail sales, and more broadly consumption, appear to have benefited from stable employment: according to the NBS, survey-based unemployment in the big cities was below 5% at end-March and the labour demand-to-supply ratio was 1.13 at end-February. Household disposable income per capita also increased by 7.0% y/y in Q1 in real terms, faster than the GDP growth rate. In March, retail sales related to residential housing (including furniture, home appliances and construction materials) continued to grow faster than other items.”

“Consumption remained the main driving force of growth, while the contribution from net exports turned positive. Consumption, investment and net exports contributed 5.3ppt, 1.3ppt and 0.3ppt to Q1 growth, respectively, according to the NBS. Although the Q1 trade surplus was 40% lower than in Q1-2016, net exports of goods and services excluding price effects registered positive growth. We estimate that consumption grew 9.1% y/y and investment grew only 3.2% y/y in Q1, confirming that recent FAI acceleration owed much to higher prices.”

“Our monthly growth tracker suggests that the near-term hard-landing risk is low. Among 15 current indicators, nine strengthened and six weakened. Among seven forward-looking indicators, four strengthened and three weakened.”