China: Growth momentum will moderate in Q2 - ANZ

Analysts at ANZ point out that China’s April data signal a moderation in Q2 GDP, as indicated by a sharp decline in industrial production (IP).

Key Quotes

“Our GDP Tracker finds that IP explains 82% of China’s growth momentum. The data today is in line with the drop in manufacturing and service PMIs during the month. The decline in PPI inflation from February’s peak of 7.8% y/y suggests the end of the commodity-driven recovery. New orders are likely to fall in the near term.”

“The decline in commodity prices seems to have begun to negatively affect the economy. Fixed asset investment (FAI) growth slowed to 8.9% y/y ytd for the first four months of 2017 from 9.2% prior. This suggests a 8.3% y/y monthly growth in April, a big drop from the 9.5% seen in March. In particular, investment in the mining sector fell 9.5% y/y on the back of commodity price consolidation. Infrastructure investment and property investment, however, reported solid growth, increasing 23.3% y/y (ytd)  and 9.3% y/y, respectively.”

“Financial deleveraging is expected to cool some economic activities in the next two or three months. Regulatory tightening in the banking, insurance and asset management sectors in the past few months is beginning to worry the money market, with the 3m SHIBOR rising to 4.41% last Friday (12 May) compared with 3.87% on 26 January before the Lunar New Year holidays. The 1y IRS (3m SHIBOR) has also jumped by 30bps since 14 April. Banks relying on interbank funding will face higher funding costs and will likely tighten their lending. Interest rate sensitive sectors such as financial intermediation activity may cool.”

“Small and medium sized property developers are likely to be affected by difficult access to credit due to tightening of the shadow banking sector. Despite April’s solid 9.3% property investment growth, we expect annual investment in the property market to converge to 2016’s level of around 7% in H2. However, the government is not attempting to clamp down on housing supply. Rather, the tightening measures only aim to curb over-heating on the demand side. There are still cities mulling to increase land supply. A steady level of real estate construction will still be maintained.”

“The government will aim to maintain growth momentum ahead of the 19th Communist Party Congress in November (actual date to be confirmed) and will aim to achieve full year GDP growth target of 6.5%. Growth will continue to be underpinned by a strong infrastructure pipeline which also echoes the Belt and Road initiative and urbanisation projects like Xiong’an. China seems to have returned to an investment-driven growth strategy. With this in mind, we forecast that FAI will still expand by 9-10% in 2017 (2016: 8.3%).”

“Given the strong reaction to financial deleveraging in the money market, we believe the People’s Bank of China will attempt to restore sentiment by liquidity injections via more active MLF operations in the near term. Indeed, the Monetary Policy Executive Report issued last Friday (12 May) reiterated the authorities’ “prudent and neutral” monetary policy stance. The target remains to expand total social financing by 12% in 2017, suggesting that the deleveraging is to differentiate good versus bad credit only as opposed to reducing the central bank’s balance sheet.”