China: Solid growth momentum in Q1 will not last – Nordea Markets

Amy Yuan Zhuang, Nordea's Chief Asia Analyst, suggests that China’s growth is solid now but over the course of the year, they expect it to be dragged down by a cooling housing, monetary tightening and protectionism.

Key Quotes

“On the other side, infrastructure investment and household consumption will continue supporting growth.”

“The Chinese economy delivered solid growth of 6.8% y/y in Q1, same as consensus expectation and slightly higher than our forecast of 6.7%.”

“However, we do not expect the positive momentum to last. Both domestic and external demand are at risk of deteriorating over the course of this year, prompting growth to moderate. In fact, the quarter-on-quarter growth of 1.4% in Q1, which is lower than the previous reading of 1.6%, suggests that momentum is weakening.”

“The main drag to domestic activity this year will be the government’s efforts to cool the housing market and construction starts. The manufacturing sector will be affected and the PMI indices would likely fall below 50. Slowing manufacturing activity is already showing signs. The Caixin PMI showed a broad-based fall in all major sub-indices in March. Industrial production, also released today, grew by 6% in March, more slowly than the first two months of the year.”

“Apart from government stimulus, in the form of infrastructure investment, household consumption will likely continue functioning as a growth driver. In Q1, consumption contributed with more than two-third of the total GDP growth. The recovery in industrial profits last year is expected to lift household disposal income this year and support the consumption story.”