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.
Main contributors - Christopher Swann, Sagar Khandelwal, Vincent Heaney, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report: Signs of policy traction in China, 17 April 2019.