What Does The Strong Q1 Growth Mean For China?

China announced a growth surprise last week. After this solid first quarter performance, the central government may be in the unique position to achieve its growth target - even while tightening. In the first quarter, China’s economy grew 6.9 percent; slightly faster than expected and led by strong expansion at factories.

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What the first quarter data reflects is solid growth in several fronts. Retail sales soared to 10.9 percent on year-to-year basis, which reflects steady progression in the ongoing rebalancing of the Chinese economy toward consumption. Clearly, it was driven by recent gains in wage and credit growth, despite declining subsidies on car demand.

At the same time, industrial production climbed to 7.6 percent on an annual basis, which was supported by government infrastructure investment, including state owned enterprises (SOE) and property markets. Overall growth increased to 6.9 percent, which was fueled by trade and financing.

Retail sales soared to 10.9 percent on year-to-year basis, which reflects steady progression in the ongoing rebalancing of the Chinese economy toward consumption.

Such data herald strong beginning of the year for China, but also a positive contribution to regional growth and, due to the mainland’s role as the second-largest economy in the world, to global growth prospects.

The question is, can this growth performance be sustained in the coming months?

Conditions for sustained growth

In the first quarter, growth was fueled by heavy use of steel in the construction sector, while investment in electronics factories rose as demand strengthened in foreign markets. The former suggests slow progress in efforts to reign in excess capacity in mining output, including steel. That is likely to be noted in friction about steel overcapacity in the forthcoming G20 Summit in Hamburg, Germany.

Domestically, efforts to resolve the steel crisis are likely to strengthen with political consolidation after the 19th National Congress of the Communist Party in the fall.

In turn, the recovery of the foreign markets reflects more positive international prospects. According to the International Monetary Fund (IMF), the world economy is gaining momentum. Yet, such prospects could be undermined by a broad array of forces, including renewed “America First" protectionism, post-elections turmoil in Europe, geopolitical friction, refugee crises, and broad-scale terrorism.

Also, while government spending on infrastructure and the hot property market helped to lift growth in the first quarter, the role of infrastructure investment, including SOE and property markets, is paving way for greater tightening in the near future.

In the 1990s, Western "shock therapy" advisers promoted the rapid privatization of state-owned companies. The net effect was an economic disaster.

Last month, prices accelerated again in the sizzling property market shaking off the impact of recent cooling measures. In the near-term, more tightening measures are likely as price momentum builds, although peaking price gains and sales in top-tier cities suggest that future curbs may be more targeted.

President Xi Jinping has called on officials to deepen reform of SOEs. The objective is not an overnight liberalization. In the 1990s, Western "shock therapy" advisers promoted the rapid privatization of state-owned companies. The net effect was an economic disaster.

Instead, Chinese success is based on gradualism and incremental change, which allowed the share of SOEs in industrial output to decline dramatically from 75 percent in the late 1970s to 25 percent. After the Party Summit in the fall, pragmatic SOE reforms are likely to accelerate as well.

Growth despite tightening

In the coming months, Chinese growth prospects will be fueled by strengthening fundamentals domestically and internationally. Yet, the People’s Bank of China (PBOC) must remain vigilant, due to the risk of inflation.

Chinese economy must cope with likely adverse implications from the US Federal Reserve’s expected two more rate hikes

As leading indicators, particularly the producer price index (PPI), are expected to rise, and as inflation tends to emulate the PPI over time, the PBOC’s tighter stance is warranted, even if food prices have remained under control for now.

Internationally, Chinese economy must cope with likely adverse implications from the US Federal Reserve’s expected two more rate hikes, which will contribute to new growth challenges around the world, particularly in the emerging and developing economies.

Furthermore, while the first Trump-Xi Summit managed to contain many potentially adverse prospects - including new trade protectionism, currency friction and regional geopolitical tensions - all of these forces could be re-ignited by potential deterioration of bilateral ties.

In 2016, China’s actual growth was 6.7 percent. The current target for 2017 is “around 6.5 percent". What the strong first quarter performance does make possible is a more decisive shift to fiscal and monetary tightening in the second half of the year, while keeping the current growth target intact.

That’s the real achievement of the Chinese economy in the first quarter.

Disclaimer: Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at ...

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Kushal Kumar 5 years ago Member's comment

While it may sound a good sign for Chinese economy to grow in 2017, still this Vedic astrology writer has to caution that country for coming times. June to September, more so 19 August to 4 September in year 2017 looks to be calling for caution in relation to more than one area. War or natural disasters or cyber and other failures of technical nature may impede the economy.

Anastasija Janevska 5 years ago Member's comment

@[Kushal Kumar](user:7878), what does astrology have to do with investing?

Charles Howard 5 years ago Member's comment

Nothing.