China: Holding steady but headwinds further out - Standard Chartered

Research Team at Standard Chartered notes that China’s real economic activity gained momentum at the start of the year, having stabilised since H2-2016.

Key Quotes

“Value-added industrial production (IP) picked up to 6.3% y/y from 6.0% in December 2016. Fixed asset investment (FAI) growth accelerated to 8.9% y/y in January-February from 6.5% y/y in December. Infrastructure investment growth rose substantially to 27.3% y/y, and private investment growth picked up to 6.6% y/y. But retail sales slowed significantly to 9.5% y/y (from 10.9% in December), and real-estate investment softened to 8.9% y/y, from 11.1% y/y in December. FAI growth may have been largely driven by input price effects, as PPI inflation has surged in recent months. As such, we see limited upside for the real economy in Q2-2017 and beyond.”

“Our growth momentum tracker suggests similar story. The official manufacturing PMI for February climbed to 51.6 from 51.3 prior. But the nonmanufacturing PMI fell in February, and leading indicators for investment (newly started projects and funds secured) both softened. PPI inflation continued to soar, but may have peaked in February. We expect GDP growth to stay strong at 6.8% in Q1, but decelerate for the rest of the year.”

“Consistent with our expectations, the government has lowered the 2017 growth target to around 6.5% from 6.5-7.0% in 2016 at the ongoing National People’s Congress. The policy priority has been shifted to containing financial risks and asset bubbles in 2017, while maintaining steady growth. Fiscal policy remains expansionary, as the budget deficit for 2017 rises to 4.2% of GDP by our calculation. Monetary policy has tightened and financial de-leveraging is now a policy priority. We keep our 2017 growth forecast at 6.6%, assuming full implementation of expansionary fiscal policy.”