China: Growth may have peaked for the year – Standard Chartered

According to the research team at Standard Chartered, China’s economy benefited from a few positive factors in Q1 and while some of these factors may continue to boost growth in the quarters ahead, others may turn from tailwinds to headwinds. 

Key Quotes

“The services sector continued to grow at an organic pace of 7.5-8.0% y/y, becoming a stabilising factor in the economy. We believe the sector suffers from a shortage of capacity and has the potential to sustain rapid growth for longer.”

“Export growth turned to positive 8.2% y/y in Q1 from negative 5.2% y/y in Q42016. We expect the global growth recovery to continue and the Chinese yuan (CNY) to be stable against a basket of currencies, lending support to China’s exports in 2017. The positive export outlook is confirmed by strong PMI new export orders (in expansionary territory for five months in a row) and industrial goods delivered for exports (accelerated to 12.9% y/y in March). The risk of a trade war with the US has receded substantially, with the Trump administration adopting a more conventional approach to international trade and currency issues, as seen in the US Treasury report issued last Friday, which did not label China as currency manipulator.”

“Inventory restocking has boosted IP in recent months, but appears to be running out of steam. With the PPI turning from deflation to inflation and growth hitting a near-term bottom, factories have sped up production, contributing to the strong IP prints. As a result, industrial inventory growth turned from negative growth around the middle of last year to positive 6.1% y/y in January-February. The appetite to accumulate inventory further will likely weaken unless demand accelerates.”

“Fiscal spending was frontloaded in Q1, which may reduce ammunition for the rest of the year. Fiscal spending grew 21.0% y/y in Q1, while fiscal revenue increased 14.1% y/y. As a result, the fiscal balance registered the first Q1 deficit since 1995, confirming more expansionary fiscal policy. With fiscal spending running ahead of schedule, its growth will very likely decelerate going forward.”

“Several other headwinds are likely to limit the growth upside, in our view. Property investment may slow substantially in H2 as a result of unprecedented tightening measures introduced since Q4-2016 to contain the asset bubble. Both planned investment under newly started projects and funds secured for investment recorded negative growth y/y in Q1. Car sales, a major driver of retail sales last year, showed signs of fatigue in Q1 following the expiration of tax incentives.”