Encouraging Signs
Though the 6.7% y/y GDP rise in Q1 represented a slowdown from Q4 2015, improved principal indicators bolster our confidence in future growth. Industrial output was up 6.8% y/y in March, a 0.7 pps rise from Q4. Fixed asset investment excluding agriculture rose 10.7% y/y, up 1.4 pps, with growth especially strong in March. The real estate market has been heating up, with sales up 33.1% y/y.
CPI rose 2.3% y/y in March, flat on February. Industrial prices had been negative and falling for four years, but rebounded in March. The ex-factory price index rose 0.5% m/m, and PPI rose 0.3%. M1 was up 22.1% y/y at the end of March, a significant 6.9 pps climb from the end of 2015 – and accelerating. Savings deposits rose 19.4% y/y, up 5.7 pps from the end of 2015 – also a major increase.
China on May 1st rolled out a value-added tax system for all industries that previously saw business tax levies. The effect was a reduction of firms’ tax burden, and a rise in local governments’ notoriously low tax share. National fiscal revenue in Q1 increased by a still-low 6.5% y/y. Central government fiscal revenue rose 1.2% y/y, while local government fiscal revenue increased 10.4%.
The yuan was moderately volatile, and reached 6.5/$1 in April, after bottoming out at almost 6.6 on January 7th, mainly driven by the weakening dollar, due to the Fed’s failure to increase its interest rate. Capital outflow pressure is also diminishing. The exchange regime seems to be shifting from dollar pegging to currency basket-pegging. China continues to run a trade surplus, but the exchange rate is increasingly affected by capital flows.
The People’s Bank of China on February 2nd announced it would lower the mortgage payment ratio in most cities. Both Prime Minister Keqiang Li’s recent moves to cut taxes, and to convert the sales tax to the value added tax, derive from the supply-side reform top Chinese leaders began discussing in November. Supply-side reform not only traditionally cut taxes for firms, but also allowed for cutting overcapacities and over-leveraging, by letting “zombie” firms die, to address capital misallocation, and to boost aggregate productivity.
Big cities have recently been in the headlines, as housing prices in first-tier cities are surging. Housing prices in Shenzhen, especially, have risen more than 50% over the past year. Buyers’ strong expectations are based on their increasing incomes, rising by 10% per year. China still has some of the world’s strictest housing purchase rules, but is also experiencing the biggest rural-to-urban migration in human history. We do not rule out the risk of empty towns, but these mainly exist around a very limited number of small cities, and their systemic risk is quite low.
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