China: The economy is stabilizing - BBH

Masahi Murata, Vice President at Brown Brothers Harriman is sharing his assessment of the Chinese economy:

"The Chinese economy has stabilized since H2 2016. GDP growth slowed to 6.7% in 2016 from 6.9% in 2015, but touched the top of the government goal (6.5-6.7%). Its official manufacturing PMI has been above 50 since August 2016 and reached 51.6 in February, above the Q4 average of 51.4. Q1 2017 GDP is likely to grow by 6.7-6.8% and build a sense of reassurance that growth in 2017 could be over 6.5%, the official goal set at the National People’s Congress held in March. The government will support the economy by fiscal stimulus. It said fiscal deficit would be 2.4 trillion RMB in 2017, larger than the 2.2 trillion RMB in 2016"

"Inflation pressures have strengthened mainly due to high oil prices and a weaker yuan. February China PPI accelerated to 7.8% y/y, the highest since September 2008. Its CPI fell to 0.8% y/y in February from 2.5% y/y in January, but it is distorted by the Lunar New Year holiday. Non-food CPI inflation remains over 2%."

"The external account has worsened. The current account in Q4 2016 posted a $37.6 billion surplus, down 59.1% compared to Q4 2015. The trade account worsened to a deficit, $9.15 billion, which is the first deficit in the past 3 years. Exports remain weak while imports continue to expand. The capital outflows have persisted as the Q4 non-reserve financial account deficit was $187.2 billion, the biggest since the data started in 1998."

"Chinese officials are prepared to come under strong pressures from the Trump administration. Yet Trump's strategy and policy adviser Stephen Schwarzman indicated in a recent interview that the US President is likely to temper his criticism of China. What Schwarzman hints at, and the media reports have expanded upon, is that diverse views are represented in the Trump cabinet and among his advisers. Those that are most rooted in liberal globalism are well represented among the economic advisers and cabinet secretaries. It does not mean they will carry all arguments and win all policy debates, but it does suggest that Trump’s hardline economic stances may be softened."

"The yuan continued to drop in 2016 and it has softened in Q1 2017. Officials have intervened to support the yuan, as foreign reserve decreased below $3 trillion in January before rebounding in February. Heightened tensions between China and the US and persistent capital outflow could weigh on the yuan, however."