The Chinese economy has kickstarted 2017 on a positive note, with economic data releases adding impetus to the country's growth momentum. February’s industrial production (IP) release beat market expectations, accelerating 6.3%yoy; boosted by manufacturing and utility sectors. Fixed asset investment (FAI) also exceeded expectations coming in at 8.9%yoy, from 8.1%yoy in January. Meanwhile, retail sales fell short of the market consensus (although still stood at 9.5%yoy) driven by a fall in auto sales; this was possibly due to overbuying of cars in 2016 ahead of the reduction in tax incentives on low-emission cars this year.
The property sector, which has been somewhat of a concern, has also shown signs of moderate recovery with property investment gaining 2% to 8.9%yoy. According to China’s National Bureau of Statistics, third- and fourth-tier cities have benefited from the recent increase in property sales which is in-line with policymakers’ push to reduce inventory in the lower-tier cities: part of the five economic tasks of 2017.
Earlier this month at the National People's Congress (NPC) it was announced that China’s growth target was officially lowered to 6.5% (from 6.5-7%). With the recent bout of positive data prints, and all else being equal, we do not expect the economy will struggle to achieve this level of growth, and could in fact exceed it. However, the government would not want the economy to overheat, nor push for growth just so that a target can be achieved, rather continue on its path of more quality and sustainable growth while identifying and managing financial risks.
No doubt the growth rate will determine the monetary and fiscal policy mix. We expect policymakers to maintain a bias towards proactive fiscal policy, especially as monetary policy is constrained as the PBoC looks to stem capital outflows. The lowly 3% budget deficit as a percentage of GDP this year gives the government sufficient room to deploy all number of quasi-fiscal measures to maintain growth targets: if for example inflation spikes and the central bank has to tighten. Also with a 25bp Fed rate hike fully priced in this week and more rate increases priced in for this year, a widening in real interest rate differentials could force the Chinese central bank to tighten. For now, we believe the PBoC will maintain ‘prudent and neutral’ monetary policy, with no rate hikes expected at this juncture.