April 17, 2018 / 2:27 AM / in 6 months

Instant View - China's first-quarter GDP rises 6.8 percent year-on-year, slightly ahead of forecasts

BEIJING (Reuters) - China’s economy grew 6.8 percent in the first quarter of 2018 from a year earlier, official data showed on Tuesday, slightly above expectations and unchanged from the previous quarter.

The data points to continued resilience in the world’s second-largest economy even as its export outlook is being clouded by escalating tensions with the United States, its largest trading partner.

KEY POINTS

* Q1 GDP +6.8 pct y/y (f’cast +6.7 pct, prev +6.8 pct)

* Q1 GDP +1.4 pct q/q (f’cast +1.5 pct, prev +1.6 pct)

* March industrial output +6.0 pct y/y (f’cast +6.2 pct, Jan-Feb +7.2 pct)

* March retail sales +10.1 pct y/y (f’cast +9.9 pct, Jan-Feb +9.7 pct)

* Jan-March fixed asset investment (FAI) +7.5 pct y/y (f’cast +7.6 pct, Jan-Feb +7.9 pct)

*Q1 real estate investment +10.4 pct (Jan-Feb +9.9 pct, 2017 Q1 +9.1 pct)

MARKET REACTION:

Asian stock markets and China’s shares pulled higher after minor wobbles following the data. The Australian dollar, seen as a liquid proxy for China demand, was also steady.

COMMENTARY:

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE

“While we don’t think China’s economy is expanding as rapidly as the official figures claim, there is broader evidence to suggest that a recovery in industry did prevent growth from slipping too much last quarter.

“A key driver of this has been the easing of winter pollution controls – air quality has deteriorated markedly in north eastern China in recent months.

“But outside of industry, activity looks to have cooled recently. Construction growth is slowing as local governments pair back infrastructure spending in order to control debt levels. Meanwhile, property sales have continued to soften and retail sales edged down in real terms last quarter.

“Looking ahead, while the Chinese economy held up fairly well in Q1 we think a further slowdown is on the cards before the end of the year. In particular, while the one-off boost to industrial production from the easing of pollution controls will fade before long, the drags from tighter fiscal policy and slower credit creation will continue to weigh on broader activity.”

IRIS PANG, GREATER CHINA ECONOMIST, ING, HONG KONG

“If you look at the retail sales data it tells you a lot about consumption. It is not seasonal - if you look at growth in cosmetics, spending on clothing, spending on automobiles, there has been a persistent trend for a few months. Any Chinese New Year effect (in consumption) has been netted out.

“Consumption is really strong, there is strong wage growth in urban areas. We underestimated the power of consumption in China. Property investment is actually rising so I would not conclude the property segment is derailing the economy.

“China is building high-tech investment and high-tech manufacturing that act as supporting pillars for the economy. The risk in the coming quarters would really be in the trade tensions with the U.S.

“If it (turns) into a trade war, then it’s not just the export or import sectors that would be affected. It would affect the whole manufacturing chain and investments. It would be very complicated.

“But if exporters can find alternatives the hit from U.S. tariffs is smaller, it may not affect employment and wage growth and therefore it may not affect consumption so I would still be optimistic on China’s economy.”

ROBERT SUBBARAMAN, CHIEF ECONOMIST FOR ASIA EX-JAPAN, NOMURA, SINGAPORE

“There’s two stories here, one backward looking and one forward looking. Underneath the stable GDP growth is quite rapid rebalancing from industrial, investment and old economy sectors to consumption, services and new economy sectors like tech. This is encouraging.

“The more timely March data, however, point to nascent signs of a growth slowdown underway, led by these old economy sectors.

“We do not expect the growth in the new economy sectors to fully offset the slowdown in the old economy and heavily indebted sectors in the quarters ahead, and forecast GDP growth of 6.3 percent in Q4 2018. This is a necessary adjustment to improve the quality of China’s growth.

“After some relaxation of pollution curbs during the winter, which we think contributed to the rebound in industrial production growth in Jan-Feb, it seems that enforcement has tightened again which helps explain the renewed slowdown in IP growth in March.”

TORU NISHIHAMA, CHIEF ECONOMIST AT DAI-ICHI LIFE RESEARCH INSTITUTE, TOKYO

“China’s growth was stronger than expected because exports are doing well. This reflects a healthy global economy. Consumer spending is solid and the manufacturing sector is doing well.

“I expect growth this year of 6.6 percent, but trade friction between the United States and China is growing. If exports are driving China’s growth, then there is potential damage from trade friction.

“Deleveraging is a concern. China will continue to gradually raise rates but tightening policy excessively would hurt the economy.

“There is underlying demand for property because of urbanisation, which won’t change. We can see how active the property market is.”

HAIBIN ZHU, CHIEF CHINA ECONOMIST, J.P. MORGAN, HONG KONG

“First quarter GDP data is on the positive side, it reduced the concern that economic activity has slowed down. If you look at domestic activity indicators, industrial production, FAI, retail sales ... they are holding up very well.

“We had been talking about a concern that there would be some pay-back after Chinese New Year, that data would be on the weak side in March, but actually it is holding up very well.

“We feel positive because there was so much concern about the trade tensions between China and the U.S. and whether it will affect the companies’ investment or manufacturing behaviour but I think on the domestic front, retail sales, investments are still holding up.”

“Economic rebalancing plays a pretty important role. If you look at the policy side, there’s no stimulus. The government talks about cutting excess capacity, talks about environment protection. Logically these efforts should slow down China’s economic activity. But the negative impact is smaller than we thought.

“But environment protection is the single area with the strongest investment growth in 2017. The industry spent a lot in new energy, waste water disposal and other environment-related concepts. That’s offsetting capacity reduction and the shutting down of polluting firms.

“Secondly, it is about the efficiency of the policy. The efficiency for credit allocation has improved. We see a compositional shift from high credit intensive industries to new industries.”

JEFF NG, CHIEF ECONOMIST, CONTINUUM ECONOMICS

“Despite the high base in Q1 (2017), the industrial production figures still look relatively resilient. Producer prices continue to grow, so that’s helping the manufacturing sector and services sector remained strong as well. It shows that China can certainly outperform the 6.5 percent growth target that they’ve set themselves.

“Trade frictions will have limited downside risks. If the domestic economy is doing well, it will still contribute to at least 90 percent or even more than 100 percent of growth. China continues to diversify trade to other regions so it won’t be a huge concern.

“Property market cooling and anti pollution measures will take some time to resolve. There are a lot of initiative but with China being so big, it will still take some time. Implementation will still remain slow and gradual.”

GRAPHIC:

China's GDP trends: tmsnrt.rs/1PFmwVG

BACKGROUND:

- China’s economy carried more growth momentum into early 2018 than initially expected, keeping a synchronized global recovery on track even as worries grow about a trade war.

- At the start of this year, economists had pencilled in a slowdown in growth to 6.6 percent in the first quarter, easing slightly from 6.8 percent in the fourth quarter and a forecast-beating expansion of 6.9 percent for full-year 2017.

- Generally stronger-than-expected readings in the first two months of the year offset some signs of softer growth in March, with first-quarter performance remaining solid.

- While growth could strengthen in spring due to seasonal factors such as a pick-up in construction, analysts maintain that activity will eventually start to cool, weighed down by cooling property market, curbs on industrial pollution and rising borrowing costs for companies as regulatory crack down on riskier lending practices.

- Trade frictions with the United States and a stronger yuan may also drag on exporters, even if Washington and Beijing are able to negotiate a compromise and avoid the worst of the tit-for-tat tariffs proposed last month.

- Analysts expect full-year 2018 growth will slow to 6.5 percent, in line with the government’s target, even without any trade shocks.

- China’s leaders pledged last month to continue their crackdown on systemic risks and slow an explosive build-up in debt, but some analysts believe the government could quickly u-turn on policy and unveil fresh stimulus again if economic growth threatens to slow more sharply than expected.

Reporting by Reuters Hong Kong and Singapore newsrooms and Asia bureaux; Editing by Kim Coghill & Shri Navaratnam

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