Internal growth is strengthening

CHINA - Forecast 09 May 2019 by FAN Gang and Chunyang Wang

The Chinese economy began showing a recovery pattern in Q1. GDP rose 6.4% y/y, though it was flat on Q4 2018. Industrial output was up 6.5% y/y, and up 0.8 pps from Q4. In March in particular, GDP rose 8.5% y/y, and up 1.4 pps from Q4 -- a powerful rebound, and its fastest growth rate since August 2014.

Investment was up 6.3% y/y in Q1, showing no clear trend. Resoundingly, state investment rose 6.7% y/y, up 8.3 pps from Q3, signaling government’s resolve to support the economy. Retail sales of consumption goods were up 8.3% y/y in Q1, flat on Q4. Exports were up 6.7% y/y, down 1.8 pps. Imports rose 0.3% y/y, down 9.2 pps. The net export impact on China’s GDP turned out to be positive, the U.S.-China trade war notwithstanding.

CPI was up 2.3% y/y in March, a rise of 0.8 pps from February. The main financial indicators also rose. M2 was up 8.6% y/y, up 0.5 pps from the end of 2018. M1 was up 4.6% y/y, up 3.1 pps from the end of 2018, a strong recovery.

The People’s Bank of China recently increased its gold holdings to 59.94 million ounces, diversifying its portfolio from U.S. Treasury bond holdings. This diversification, plus the growing China-U.S. trade surplus, gave China leverage in negotiating with the Trump administration. We doubt this trade war will last too much longer, even given Trump’s controversial May 5th tweet, as he often mentions his strategy of playing an uncertainty card for a deal. Major financial indicator stability erased concerns over capital outflows, and investor pessimism.

On March 15th, at the end of its annual policy conference, Beijing passed a new foreign investment law, in which it promised to give foreign firms treatment equal to domestic firms. Forced technology transfers will be banned. This policy demonstrates China’s commitment to continue opening, consistent with previous government claims. The equality law will compensate for the negativity from growth slowdown and trade war. We believe FDI, crucially built on investor confidence, may increase, though FDI has already been stable.

The second Belt and Road Initiative forum in Beijing during the week of April 24th hosted 37 countries, with eight more countries added, among them two new European Union countries, Austria and Portugal. This initiative and forum will enhance global economic cooperation. We believe the Chinese government not only uses policy instruments to smooth domestic economic cycles, but also to calm the international business cycle, adding strategic international investment. This can be seen from the relatively stable exchange rates, external accounts, FDI and ODI.

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