China’s economy at a glance: January 2018

China’s official data may underestimate the strength of growth in 2017.

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Overview:

  • China’s economy grew by 6.9% in 2017 (compared with 6.7% in 2016), the first acceleration in growth since 2010. This was well ahead of the Government’s annual growth target of 6.5%. That said, it is possible that the official figure underestimates the strength of growth in 2017 – given that several local governments have confirmed that 2016 economic data was overstated. We will be watching closely this year for any revisions to historical data. Our forecasts for growth are unchanged, at 6.5% in 2018 and 6.25% in 2019.
  • Growth in China’s industrial production edged higher in December – increasing by 6.2% yoy – with growth remaining around the trend levels exhibited since the start of 2015. Despite this stable growth, output in a number of key industrial sectors was weaker. In particular, steel output was well below the recent peaks in August – suggesting the capacity closures across 26 northern Chinese cities may be having an impact.
  • China’s fixed asset investment accelerated in December – increasing by 7.2% yoy (compared with 6.3% in November). Producer price inflation has softened, meaning that real investment accelerated more rapidly – up to 2.5% yoy (from 0.8% previously). Real estate investment dipped and house sales remained weak in December, however residential construction starts remained stable. We continue to expect that softer house prices and sales (along with weaker investment) will flow through into weaker construction activity in 2018 – a contributor to slowing economic growth.
  • China’s trade surplus widened substantially in December, with exports growing strongly month-on-month (to a new record level), while imports remained essentially stable. The surplus totalled US$54.7 billion – the largest level since January 2016. That said, there is considerable uncertainty about the accuracy of the export figure – with a sizeable increase in the reported value of exports to Hong Kong in both November and December (relative to earlier in the year). It appears possible that false invoicing – overstating exports as a means of circumventing capital controls – may be returning (more on this in our December China Economic  Update).
  • China’s new credit issuance totalled RMB 19.4 billion in 2017, an increase of 9.1%. The bulk of the increase in credit issuance occurred across the second and third quarters – up by 36% yoy and 24% yoy respectively – while it declined in Q4 – falling by 13% yoy. Traditional bank loans accounted for the major of new credit in 2017, at 71% of the total (the largest since 2009), indicating that tighter regulation around shadow banking has impacted the sector.
  • The People’s Bank of China responded partially to the increase in US interest rates – lifting the rate on the Standing Lending Facility and Reverse Repos by 5 basis points. Despite these increases, the 7 day Shibor remained has remained broadly stable. In early January, the PBoC stated that it will continue its “prudent and neutral” monetary policy and maintain stable liquidity in 2018. This may necessitate gradual increases in rates across the year, should the US Federal Reserve raise rates as expected.

For further details, please see the attached document: