China: GDP remains at 6.9% via strong June activity - TDS

Defying consensus expectations for a slight step down in growth momentum, Chinese GDP growth remained at 6.9% (TD and mkt 6.8%), notes the analysis team at TDS.

Key Quotes

“A firmer print would normally put a floor under risk, but so far the Asian-market reaction has been rather subdued, Shanghai underperforming at –0.7%, CNH not really reacting either, likely exacerbated by the Japanese market close. The key China-linked commodity currency AUD remains well above $US0.78, albeit already there late last week via strong local data and soft US retail sales and inflation out of the US on Friday night.”

“The Chinese government’s GDP target for 2017 is “6½% if not better” and growth continues to far exceed the minimum.”

“While developed economy demand has not been insignificant, we found that China played a dominant role in EM economic fortunes. While US trade policy remains a notional threat, it is the Chinese economic dynamic that is more significant for EM assets. We expect the reflationary impetus behind China’s rebound and the EM export recovery to have played out by the end of Q2.”

“TD’s due diligence trip to China raised a number of key issues, most notably the regulatory environment, growth, capital flows, and geopolitics. Discussion around capital flow risk were enlightening, as well as the “countercyclical” factor in USDCNY fixing.”

“Data summary

• Chinese GDP rose by 6.9%/yr in Jun qtr 2017, pipping consensus expectations for either a step down to 6.8% (21/39 analysts) or two steps down to 6.7% (12/39).
• Activity indicators for June were strong across the board: retail sales expanded by 11.0%/yr (mkt 10.6%, TD 10.8%, prior 10.7%) while industrial production jumped from 6.5% to 7.6% (mkt unchanged at 6.5%).
• The jump in manufacturing PMIs in June did translate into a pop in activity, so July PMIs will be closely eyes for signs of fatigue or further acceleration.
• Investment was 8.6%, the same as the prior print, but no upside surprise here. This is consistent with the government's big-picture plan to wind back heavy industry in favour of households, services and consumption in terms of contribution to GDP growth.”