China’s 6.9 percent GDP increase in the first quarter of 2017 beat consensus estimates of 6.8 percent year-on-year (yoy) growth. The economic performance was fueled by a mixture of old-style policy-driven stimulus and increased demand in export and retail sectors, with the underlying drivers breaking down as follows:
Accelerating investment: So much for an end of the days of investment-driven growth. Fixed asset investment (FAI) grew 9.2 percent yoy and rippled through the economy in Q1 2017, exceeding the 8.1 percent yoy increase of 2016 and beating the 8.9 percent growth in January and February 2017. The longed-for rebound in private investment – worth 61 percent of total FAI – emerged in Q1, growing 7.7 percent yoy compared with 3.2 percent yoy in 2016. Meanwhile, government infrastructure spending grew 23.5 percent yoy as local governments turned on the taps, helped by the rollout of RMB 19.5 trillion ($2.83 trillion) in PPP funding.
Industrial upturn: Fired by the infrastructure investment boom and an export surge, growth in industrial production picked up to 7.6 percent yoy in March following a 6.3 percent yoy reading in February. The industrial upturn coincided with China’s biggest ever monthly output of steel.
Rebalancing toward consumption: Though investment accelerated, retail sales grew faster, giving some support to forecasts of China’s emerging consumer-driven economy. Retail sales bounced 10.9 percent yoy in March, following a 9.5 percent yoy increase in February, driving a 10 percent increase for Q1 2017 in total. That’s good news for Jack Ma of Alibaba too, since online retail sales grew at an eye-popping 25.8 percent y-o-y.
Solid real estate build-out, for now: Despite a policy-driven sales slowdown, China’s real estate developers are still building property, which propelled real estate FAI to 9.1 percent yoy growth in Q1 2017. That said, this doesn’t signal a new inventory uptick, because developer investment in project construction follows property sales, meaning the new build-out is of units bought some six-to-nine months ago. With this in mind, the current sales slowdown will likely result in slower investment in the second half of 2017.
Debt specter looms large: The third highest loan outflow in Q1, plus estimates of a surge in off-balance sheet lending and signs of weakening finances at the local level suggest that concerns over debt-fueled growth remain central to the economic outlook. The People’s Bank of China may be taking a proactive approach to managing liquidity, but surging local government investment, particularly in PPP projects, suggests China may be storing up problems for the future.
Unsurprisingly, official data had lots to make the Chinese government happy — a rebounding economy beating the official target being driven by government-led investment and the emergence of economic drivers such as consumer demand and high-value manufacturing is directly in line with government strategy, suggesting an uncanny ability to tailor policy to achieve exactly the result required.
Policy details aside, the upside surprise has left markets largely unmoved. The Shanghai Composite Index was down 0.74 percent on the day of the results. With attention turning to how sustainable the Q1 2017 growth pace will be for the rest of 2017, current consensus expects a slowdown, with tighter monetary policy and a further decline in real estate sales leading a range of economists to expect a slowdown in the second half of 2017 slowdown. The IMF forecasts 6.5 percent growth for FY 2017 and 6.0 percent growth for FY 2018.