Seeking Growth of About 6.5%
Prime Minister Keqiang Li announced in a March 5th address to Congress that China was aiming for growth of about 6.5% for 2017, with CPI of about 3%. He also said the government would continue to implement a proactive fiscal policy, and maintain a prudent and neutral monetary policy, with the M2 growth rate targeted at 12% for the year.
Price inflation slowed in January-February. CPI tumbled, dragged down by falling food prices, rising 1.7% y/y, down 0.5 pps from Q4 2016. The ex-factory price index of industrial products was up 7.8% y/y, and PPI was up 9.9% y/y, down 1 pps and 1.1 pps from last December. We view the CPI decrease as transitory, but producer prices will continue to rise more slowly, given tightening monetary policy.
In January-February, industrial output increased 6.3% y/y, up 0.2 pps from Q4 2016. Fixed asset investment excluding agriculture was up 8.9% y/y, up 1.1 pps from Q4, largely driven by higher producer prices. Retail sales of consumer goods were up 9.5% y/y in nominal terms in January-February, down 0.9 pps from Q4, and up 8.1% y/y in real terms, down 1.1 pps and 1 pps from Q4. Imports in January-February rose 26.4% y/y, up a dramatic 23.7 pps from last quarter. Imports from developed countries also surged, possibly reflecting Chinese consumers’ greater demands for quality. Exports were stabile as usual, growing at around 4% y/y.
Monetary policy continued tightening in February. M1 rose 21.4% y/y, and grew around 20% y/y after correcting for the Chinese New Year effect, 1.4 pps lower than last December. M2 was up 11.1% y/y, down 0.2 pps from December. Market interest rates increased. For example, the interbank deposits from AAA-rated banks with maturities of one year had a return of 3.01% on November 1st, 2016, but were 4.18% in March 2017, a rise of more than 1 ppt. The higher rate has negative effects on corporate financing. Net financing from corporate bonds shrank for three consecutive months.
Real estate prices in China’s major cities rose around 50% y/y in 2016, according to the National Bureau of Statistics. Property sales by area were still up 25.1% y/y in January-February. 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, such as Beijing, Shanghai, and Shenzhen, but prices in second-tier cities, mostly key provincial capitals, may remain stable, while small cities and towns in the vast countryside (not those towns near large metropolitan areas) 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.
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