Growth Picks Up For Now
President Jinping Xi held a top-level meeting on April 25th, where he emphasized the importance of avoiding systemic financial risk. The market interpreted this meeting as a plan to tighten liquidity. The benchmark seven-day repo rate instantly hit a two-year high, of 3.18%. We expect the financial market to be healthier, based on government’s determination to tackle potential risks.
GDP was up 6.9% y/y in Q1, its fastest growth since last year, and up 0.1 pps from Q4 2016. Industrial output was up 6.8% y/y, and up 0.7 pps from Q4. March saw a particularly strong spike, climbing 7.6% y/y, its highest rate since 2015. Fixed asset investment-adjusted growth, conversely, was only 4.5% y/y, down 1.9 pps.
Trade was in balance in Q1, with the trade surplus shrinking -47.8% y/y. Imports expanded 24% y/y, up 21.3 pps. The yuan has been stabilizing, and in Q1, capital outflows stopped. We view these external financial indicators as stable, as the April Trump-Xi meeting signals positive U.S.-China relations.
The CEEM-PMI, an external PMI indicator recently developed by the China Academy of Social Sciences, measures China’s external economic environment. It recently rose to 53.6, above the 50 threshold. That was a stronger performance than the two general PMI indices, NBS PMI and HSBC PMI, at 51.3 and 51 respectively. While the latter two figures indicate a general economic recovery for China, the CEEM-PMI signals possible improvement of external demand. The jump of the CEEM-PMI may be mainly driven by developed markets, such as the United States and Japan.
Real estate prices in China’s major cities were up around 50% y/y in 2016. Local governments are now taking further steps to stabilize the housing market, by strengthening their cities’ housing purchase restrictions. We think there might be some corrections in China’s large “first-tier” cities, but prices in second-tier cities may remain stable, while small cities and towns in the vast countryside may continue to fall slightly in 2017. Our analysis is based on China’s sound GDP growth rate, and top-tier cities’ superior provision of public goods.
The central government announced on April 4th its plan to build a massive new city outside Beijing. The residential land supply in Beijing is also to expand significantly. These two policies indicate that China’s new approach to controlling housing bubbles will be by increasing land supply in large urban centers, and by building satellite cities nearby, instead of by prioritizing small-city development. We view this as a positive measure to alleviate housing price appreciation pressure, while dealing with excessive housing supply in smaller cities.
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