China: Stability in 2018 but trade tensions loom as a threat - NAB

Gerard Burg, Senior Economist at NAB, notes that China’s National People’s Congress was held in early March, and the economic targets unveiled at the meeting suggest that authorities expect the period of economic stability to continue.

Key Quotes

“The growth target was unchanged at 6.5% and growth in money supply and credit are tipped to be “around the same as last year”. The only significant shift is a smaller fiscal deficit target, at 2.6% of GDP (from 3.0% last year), which may point to softer (near target) GDP growth in 2018. Our economic forecasts are unchanged – at 6.5% in 2018 and 6.25% in 2019.”

“China’s trade surplus narrowed significantly in early 2018, as monthly export values pulled back from an all time high. That said, both exports and imports grew strongly year-on-year, with broad based increases in key export markets highlighting the improving global growth picture. We will be closely watching US trade policy in coming months – following the recent announcement regarding tariffs on US steel and aluminium imports. President Trump’s election campaign proposed significant trade action against China, which has so far not eventuated, but we argue would be a major negative for both economies.”

“China’s industrial production grew strongly in the first two months of the year – increasing by 7.2% yoy over the period – up from 6.2% in December 2017. In part, this growth may reflect strength in international markets – with China’s exports rising sharply, while domestic indicators (such as retail sales) were less positive.”

“China’s fixed asset investment grew by 7.9% yoy in the first two months of 2018, compared with a 7.2% yoy increase in December 2017. Softer producer prices have resulted in a strengthening trend for real investment to 4.5% yoy over the period – from 2.9% in December. While investment in real estate has trended up in early 2018, housing sales, construction and land sales data point to weaker conditions in the broader sector in coming months.”

“Retail sales growth was slightly stronger in nominal terms in early 2018 – but slowed in real terms (reflecting the upturn in inflation). Real retail sales rose by 7.5% yoy in the first two months – the weakest growth since May 2003. Despite this apparent softness, consumer confidence in China has remained strong.”

“In the first two months of the year, China’s new credit issuance totalled RMB 4.2 trillion, a decrease of 11.6% yoy. The vast majority of new issuance was from traditional bank loans – around 88% of new credit – while non-bank lending contracted sharply over this period.”

“Chinese authorities have continued to maintain stable monetary policy in early 2018 – with the 7 day Shanghai Interbank Offered Rate (Shibor) remaining within a narrow band since late last year – around 10 basis points above and below the 2.85% mark.”