China released a strong set of economic data for the 1st quarter of 2017 (1Q17) last night, with their gross domestic product (GDP) rising to 6.9%, beating analysts’ consensus at 6.8%. China’s economy grew faster than expected as higher government infrastructure spending and a gravity-defying property boom helped boost industrial output by the most in over two years (Reuter, 17 April).  Most importantly, China’s nominal GDP recorded the fastest since 1Q12, surging 11.8% year-on-year (yoy).

Following this, Macquarie Equities Research (MQ Research) issued a report this morning, summarizing China’s current economic performance.

• China not labelled as currency manipulator: Last week MSCI China was largely flattish. The onshore market was weighed on by regulatory risks while the offshore market by geopolitical risks. Last Friday, the US treasury said that China is not a currency manipulator, easing the likelihood of a trade war. It is not that surprising though, as MQ Research discussed on Feb 27 that out of the three criteria for a country to be labelled as a “currency manipulator”, China only meets one while countries like Germany, Japan and Korea meet two of them. That said, the RMB has been very boring so far this year, range-bounding between 6.8 and 6.9. Actually it could appreciate more against the US$ if it didn’t weaken against a basket of currency.

• March data beat expectations: This Monday (April 17) China released March data. Overall, it is a set of strong readings. GDP growth in 1Q17 accelerated to 6.9% (consensus: 6.8%) from 6.8% in 4Q16. More importantly, nominal GDP growth rose to 11.8% yoy, the fastest pace since 1Q12. Industrial production in March also exceeded the consensus, rising to 7.6% yoy from 6.0% in Jan-Feb. Power consumption growth jumped to 7.9% yoy in March from 6.3% in Jan-Feb. Despite the strong data, the A-share still pulled back on Monday, as investors fear that good data could prompt policy makers to be more aggressive in tightening regulations. Earlier last week the China Banking Regulatory Commission (CBRC) just said that it would carry out a special examination on regulatory arbitrage transactions, increasing the liquidity risk for the market.

• Property sales started slowing while investment still strong: In March, property sales in floor space rose 15% yoy, down from 25% in Jan-Feb. It’s set to fall further in the coming months, given tighter purchase restrictions and mortgage availability. In 1Q17, mortgage as % of new loans dropped to 35%, down from 60% in 2H16. That said, the booming property market has lowered the inventory for developers and also boosted their confidence. As the result, property investment growth rose to 9.4% yoy in March from 8.9% in Jan-Feb, while new starts rose 13.1% from 10.4%. For 2Q17, we expect property investment and new starts to slow, following the deceleration in sales.

• Faster consumption growth driven by higher income: In 1Q17, China’s disposable income per person increased by 8.5% yoy to RMB7,184. It underpins the strong retail sales growth in March, which accelerated to 10.9% yoy from 9.5% in Jan-Feb. Since Consumer Price Index (CPI) inflation is only 0.9% yoy in March, the acceleration in consumption growth should be mainly driven by real demand, mainly boosted by the hot property market and higher income.

• Robust exports and soft inflation: Last week, China also released trade and inflation data. In short, exports in March were strong, indicating that the big miss in Feb was a blip and the global economy is indeed in better shape. However, it’s an issue that 75% of China’s trade surplus in 1Q17 came from the Sino-US trade. Meanwhile, inflation data point to extremely small pass-through from Producer Price Index (PPI) to CPI. It also shows that the reflation cycle has already turned around. Last week MQ Research also published a thematic report on China’s capital outflows in 2016. Feedbacks suggest that the interest level for this topic is much lower than one year ago, when MQ Research published a report on the same topic.

Source: Macquarie Research - 18 Apr 2017