China's growth as expected, but ... - Westpac

Analysts at Westpac explained that China's GDP again came in above expectations in Q4, annual growth reported at 6.8% (market and WBC 6.7%), or 6.9% in year-to-date terms.

Key Quotes:

"On a quarter by quarter basis, growth did slow in Q4 to 1.6%. However, that was not enough to offset Q2 and Q3’s strong gains, respectively 1.9% and 1.8%. Come 2018, growth is likely to sustain a pace similar to Q4 2017.

The contributions to growth from investment and consumption in 2017 were broadly as we anticipated, consumption adding 4.1ppts in year-to-date terms and investment 2.2ppts – its weakest ever full-year outcome.

The upside surprise came instead from net exports which recorded an outsized gain of 0.6ppts as global growth fanned demand for Chinese exports. This contribution was the strongest since Q1 2015 (1.3ppts) and three times the year-to-date contribution reported for the first 9 months of 2017, 0.2ppts.

While the PMI’s correctly foretold of export’s strength, they overestimated momentum in the secondary sector overall. On both a real and nominal basis, annual growth for the sector decelerated modestly in Q4. 

The cause of this downward ‘surprise’ was construction (which is not directly included in the PMIs). From the fixed asset investment data, a clear downtrend has been apparent throughout 2017, from around 9%yr at the beginning of the year to near 7%yr currently.

A deceleration in residential construction has been a key factor here, but so has weakness in manufacturing and utilities. Investment in each of theses sectors has troughed, though the coming upcycle will be modest versus history owing much tighter credit conditions. If anecdotes are correct, then transport investment will come under pressure in 2018.

The underlying cause of the investment downtrend discussed above is the central government’s tighter control of investment decisions across the nation. Their decision to not replenish their investment pipeline is also of note.

As we have emphasised in our PMI release on a number of occasions, sub-par momentum in job and income creation has precluded an acceleration in wholesale and retail sector spending. This factor is likely to become more prominent in 2018, when we expect growth to decelerate to around 6.2%yr."