Overview:

• China’s economy grew by 6.8% yoy in the first quarter of 2018, unchanged from the rate recorded in Q3 and Q4 2017. Growth in the industrial sector accelerated (despite expectations of weaker conditions) as services growth slowed. The comparatively strong result in Q1 highlights upside risk to our forecast for 2018 (6.5%), however the risk and uncertainty presented by US-China trade tensions (and the potential for a trade war) presents a downside risk as well.

• China recorded a trade deficit in March for the first time in five years (excluding volatile Chinese new year periods). This reflected a considerable slowdown in exports. While trade tensions between China and the United States have risen rapidly over the past month, it is far too early to suggest that this has had an influence. The new orders measure in the NBS PMI survey suggests few short term concerns for exporters – pushing up to 51.3 points (from 49.0 points in February).

• Following on from surprisingly strong growth in industrial output across January and February, China’s industrial production grew more modestly in March – increasing by 6.0% yoy. Trends were mixed for construction related sectors, with cement production falling sharply, while steel output rose – close to the record levels of mid-2017.

• Growth in China’s fixed asset investment slowed in March – to 7.2% yoy (from 7.9% across January and February). That said, weaker producer price inflation meant that real investment grew at a slightly stronger rate – up to 4.7% yoy (from 4.5% in the first two months). Despite measures to cool the real estate sector – which have seen prices stabilise in the largest tier 1 cities and price growth slow in other locations, we are still waiting to see a clear sign of slowing activity in the sector. Property sales slowed in March, but new construction starts jumped.

• Retail sales data was a little stronger in March, with an upturn in nominal sales and weaker inflation pushing real sales growth up to 8.6% yoy (from 7.9% in the first two months). That said, this increase remains below the rates recorded across most of 2017. Despite the comparative softness in retail sales, Chinese consumer confidence pushed higher in February to 124.0 points – the highest reading since September 1993.

• China’s new credit issuance was considerably weaker in the first quarter of 2018, decreasing by 19% yoy. Over this period, bank loans accounted for the majority of credit issuance – with bank lending increasing by 6.9% yoy. Non-bank lending was considerably weaker – reflecting the further tightening of regulation around shadow banking.

• The new governor of the PBoC, Yi Gang, has stated that the bank will continue its prudent monetary policy and is well placed ahead of monetary policy normalisation in other major economies. We maintain an upward bias in terms of Chinese policy rates, however we expect that the PBoC will be cautious around rate increases, given the heavy debt burden of China’s corporate sector.

For further details, please see the attached document:

• China’s economy at a glance: April 2018 (PDF, 336kb)