Signs of policy traction in China

Thought of the day

by Chief Investment Office 17 Apr 2019

Chinese GDP grew by a better-than-expected 6.4% year over year in 1Q19, with strength across the board in fixed asset investment, retail sales and industrial production.

Beijing has announced more tax cuts and infrastructure spending this year, while Chinese banks lent a record USD 865bn in the first quarter. The details of March’s activity data suggest that China’s efforts to stabilize its economy are taking hold, with positive knock-on effects for the global economy:

  • January-March Fixed Asset Investment growth accelerated to 6.3% y/y, from 6.1% y/y in January-February, driven by property and infrastructure. Policy stimulus is feeding through to credit growth – total social financing expanded 10.6% y/y in March, up from 10.1% in February – and now in turn is supporting investment growth.
  • Industrial production grew 8.5% y/y (versus 5.9% expected) – the most since July 2014. The increase was broad-based across sectors and the 1% month-over-month rise the largest since August 2013. China is a significant global manufacturer but is a link in the supply chain that rarely makes a product from start to finish. Greater Chinese production signals greater production for other countries as well.
  • March retail sales growth of 8.7% y/y (consensus 8.4%) was the fastest since last September and was fueled mainly by consumer staples and electronic appliances. Within the total, the auto component declined 4.4%, but the trend has improved from the 8.5% decline in December. Signs of improvement in the auto sector are important for a European recovery. On Tuesday, Germany’s ZEW survey of expectations for April increased by more than expected to 3.1, the first positive reading in more than a year.We think proactive policy support is likely to continue in China, and we expect another 100–200bps in cuts to reserve requirement ratios this year. But a sustained macro recovery would likely preclude the need for major incremental stimulus. The rally in Chinese equities this year has stemmed chiefly from policy easing, sentiment recovery and valuation re-rating, in our view. Further equity market upside could be driven, we believe, by fundamentals and earnings growth upgrades. We prefer offshore Chinese equities within our Asia portfolios.

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