China: Policy likely to stay supportive, despite upside surprise – Standard Chartered

Standard Chartered analysts note that China’s economy expanded 6.4% y/y in Q1, the same as in Q4 but above consensus of 6.3%.

Key Quotes

“Consumption remained the biggest growth driver, contributing 65% of overall GDP growth. The labour market remains stable. Real income growth for urban households and migrant workers came in at 5.9% y/y and 5.0% y/y, respectively, better than Q1-2018.”

“We maintain our 2019 GDP growth forecast of 6.4%, which is above market consensus of 6.2%, while recognising upside risks given the stronger-than-expected Q1 GDP growth print. We also caution against risks of being over-optimistic about China’s growth outlook.”

“A moderate recovery in March inflation (despite subdued core CPI inflation) has also seen China’s 10-year treasury bond yield up 30bps this month. We think the risk of optimism running ahead of reality is rising.”

“While China’s policy makers clearly remain vigilant not to over-stimulate the economy again, we do not expect them to shift away from a pro-growth policy stance just on a strong Q1 performance.”

“Another cut to the required reserve ratio (RRR) before June is still likely in our view, to replace maturing medium-term lending facilities (MLFs) and prevent further rises in interest rates amid more dovish central banks globally. However, if the strength of China’s economic recovery is confirmed in Q2 and uncertainties surrounding the US-China trade negotiations are cleared, policy makers may begin to scale down policy stimulus from the middle of the year.”