The Daily Update - What hard landing? ......China

This morning we had a number of growth and activity reads from China, where Q4’17 GDP was released at 6.8% annualised and 2017 growth was at 6.9%, in-line with Premier Jinping’s estimate announced last week. 2017 was also the first year the country’s economy witnessed an acceleration in growth since 2010. Activity data remained robust in December, with retail sales, IP and fixed assets broadly in-line with estimates and marginally unchanged from the strong November readings. With growth outperforming, policymakers can push forth with their deleveraging and de-risking drive, and supply-side reform.

Financial risk measures appear to be filtering through as yesterday the State-owned Asset Supervision and Administration Commission (SASAC) highlighted that China’s SOEs reported a fall in the debt-to-asset ratio in 2017: an overall 0.4% fall to 66.3%. According to the statement, of the remaining 98 SOEs (down from 117 in 2012) 40 companies have actually reduced their debt ratios by as much as 1% since the crackdown last year. Also, despite Beijing's tough reforms, SOEs achieved double-digit profits in the first eleven months of 2017. Clearly, last year was a year of progress.

Also of interest is the continued strength of the Chinese renminbi, which has seen the offshore unit gain a further ~0.62% against the dollar so far this week; it is up 1.60% this year (at time of writing). News that the Bundesbank is looking to add RMB to its reserves, followed by the Bank of Spain’s comments that it is considering RMB inclusion and the National Banks of Belgium and Slovakia’s recent RMB additions (albeit small amounts initially) no doubt boosted sentiment. We continue to expect long-term RBM appreciation and should also continue to enjoy the carry gains: currently calculated at just over 2% annualised.

So, looking ahead to this year, we expect growth to stabilise around 6.7% as policymakers push for high-quality growth at the expense of rapid expansion. We do not expect benchmark rates to be hiked in response to the Fed’s rate increases this year, despite narrowing interest rate differentials; rather OMO rate adjustments are expected. The housing market could cool as financing pressures increase and government restraints filter through. Meanwhile, deleveraging, and financial risk management will remain overriding themes, while local governments will come under increasing pressure to ensure efficiency and competitiveness.

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