It was a busy week for the Chinese Statistics Bureau, which released a basket of first quarter economic data. The set of data is reflective of the stabilising trend of growth that we have expected (see April issue of Bulletin), while there are increasing signs that top government officials have successfully calmed market jitters (see here). In the near term, a stable recovery in sentiment should be due as indicated by the solid economic data, while a more significant boost will only come with proven results of leverage reduction and profitability enhancement further down the road.
The Chinese economy expanded 6.7%YoY in the first quarter of 2016, slightly below the 6.9%YoY growth in 2015 but higher than our forecast of 6.5% for 2016. With a growth rate of 11.2%YoY in the quarter, the services sector now represents 56.9% of the GDP, and continues to emerge as the key growth driver of the economy (see Chart 1). Although the 0.9% growth of the secondary industry remains a concern in the near term, there could be some support from external demand recovery and added fiscal support as we move into the second half of 2016.
Monetary stance remained accommodative during the first quarter of 2016. As of the end of March, M1 and M2 expanded 22.1% and 13.4%YoY, respectively, while new yuan loans reached RMB1,370 billion during the period. As explained previously, the dynamic momentum of M1 since 3Q2015 should signal stabilisation of GDP growth toward the end of 2Q2016 (see here).
CPI has gone up as a result of the pickup in food prices (see Chart 2). For the month of March, fresh vegetable and pork prices soared 35.8%YoY and 24.4%YoY, respectively, while other CPI components continued their regular growth trend. Producer price index (PPI) extended its trend of consecutive monthly year-on-year declines to 49 months in March, but the magnitude slightly improved to -4.3%YoY, the lowest level since January 2015. It is also noteworthy that month-on-month PPI has turned positive (+0.5%MoM) for the first time since December 2013. Nevertheless, with non-food CPI remaining modest and averaging 1.1%YoY during the quarter, these trends suggest that the chances of experiencing runaway inflation are slim in the near term so that inflation is unlikely to emerge as a factor causing any reversal of the current expansionary policy stance.
On the back of continuous income growth and the loose monetary conditions, domestic demand continued to be the key growth driver. Fixed asset investment (FAI) expanded 10.7%YoY in the first quarter, while retail sales climbed 10.3%YoY during the same period. As the Central Government is extending the adoption of value-added tax nationwide, it is believed to have had a positive impact on economic growth via industrial upgrading. Indeed, Wang Jun, Director of the State Administration of Taxation, suggested that the government intends to “ensure that all sectors will only see reduction of tax burden.”1 With the added boost from tax reform and the existing economic fundamentals, domestic demand will likely continue to expand.
International trade activities improved noticeably in March compared to the previous months. After recording a 17.9%YoY decline during the first two months of 2016, exports jumped 11.2%YoY in USD terms in March. This was in line with the PMI’s first above-50 reading in eight months (i.e. 50.2), which showed that the overall sentiment of manufacturing activities had expanded moderately. At the same time, after dropping 16.6% during the first two months, imports “only” declined 7.4%YoY in USD terms, which implied that domestic demand for foreign goods declined less abruptly. However, since such high frequency data could swing wildly from one month to another and aggregate foreign trade remained weak during the first quarter (-11.3%YoY), it is still too early to point to a reversal of trend.
Although the aforementioned economic data suggests that stabilisation of the Chinese economy is on track and is supportive of our forecast, risks remain in the near term. In particular, even though the IMF has revised the forecast of China’s real GDP growth by 0.2% to 6.5%YoY in its World Economic Outlook, it suggested that
The combination of corporate balance sheet weakness, a high level of nonperforming loans, and inefficiencies in bond and equity markets is posing risks to financial stability, complicating the authorities’ task of achieving a smooth rebalancing of the economy while reducing vulnerabilities from excess leverage (IMF, April 2016, p. 25).
These factors would remain as the headwinds of economic recovery in the short term. As China’s influence on the global economy continues to grow, the spill-over effects on external economies, including Hong Kong, is expected to linger.
1Xinhua news (13 March 2016)
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