China 2018: A balance of growth and reform – TDS

China’s constructive growth momentum throughout 2017 has been generally surprising, with an impressively strong degree of momentum past the mid-point of the year, according to analysts at TDS.

Key Quotes

“It was in Q3 that we had expected growth momentum to slow on base effects as well as efforts to control financial risk, including those of a regulatory nature that would sap liquidity generated by the shadow banking sector, and from higher interbank market rates. However, it was quite the opposite that was the case as the official expenditure accounts data showed a stronger momentum through Q3 than we had expected. Indeed, PBoC Governor Zhou had suggested ahead of this year’s fall Congress that growth in the second half of this year could indeed remain at 6.9% or 7%, a very striking statement given market expectations in Q1 of around 6.5%.”

“Our stylized measures of Chinese growth dynamics agree with a positive assessment, at least up through Q3. An underlying growth trajectory measure suggests that underlying momentum is stronger than the official national accounts data has suggested over the past four quarters. However, this comes within the context of an underlying growth trajectory measure that has previously suggested a much greater slowdown than had actually been reflected by the official data. That growth conditions have remained robust during a period of tighter domestic monetary policy, regulatory restraint against the shadow banking sector, as well as efforts to address environmental concerns and overcapacity in certain sectors, is particularly impressive and speaks to the underlying momentum of both domestic Chinese and global economic growth.”

“The strong growth dynamic and confidence expressed by governor Zhou, combined with still positive synchronized global growth and trade, implies that barring any unforeseen shock, Chinese growth is on solid footing moving into 2018. With a generally benign external economic situation, we see greater growth-relevant shifts emanating from the longer term structural reform as well as regulatory efforts.” 

“The spirit of discussion on the economy emanating from the October Congress suggested the continuation of reforms aimed at making the economy more open and market-efficient, but without loosening party oversight (and indeed likely strengthening it). The tone suggested a shift away from the old growth target methodology—though whether we see a formal target in 2018 is still debatable—towards an emphasis of quality over quantity when it comes to growth. Implicit is an effort to address what the Chinese very well recognize is unsustainable debt-driven economic growth which has left vulnerabilities in the corporate and financial sectors.”