U.S.-China trade war likely to be short-lived
Chinese economic growth was stable in Q1, with GDP up 6.8% y/y, flat on Q4. Industrial output was up 6.8% y/y, a 0.6 pps rise from Q4. Investment was up 7.5% y/y, up 1.7 pps from the lowest growth rate of 2017. But price-adjusted investment growth was up only 1.2% y/y, though private investment recovered strongly, up 8.9% y/y, a 4.7 pps climb from Q3, to its highest rate since 2016.
Retail sales of consumption goods were up 8.1% y/y in real terms, slightly less than in Q4. CPI was up 2.1% y/y in March, down 0.1 pps from January-February. Producer price growth continued to fall rapidly in March. Monetary policy is still tightening, and financial regulation is stricter, to reduce financial risk. M1 rose 7.1% y/y in March, down 11.7 pps from March 2017.
Exports were up 14.1% y/y in Q1, up 4.9 pps from Q4, and imports were up 18.9% y/y. China’s capital account seems to be shifting into balance. All external accounts turned to surplus in 2017, including FX reserves, which added $91.5 billion. Though the external market is volatile, Chinese growth is strong. The Chinese government is taking major steps to tackle any potential financial market disruption factors. We expect the RMB-U.S. dollar exchange rate to be basically stable in 2018, and the capital account surplus to rise.
In quick response to U.S. President Donald J. Trump’s March announcement that the United States would apply tariffs on $50 billion of Chinese goods, China raised its tariffs on 128 U.S. products. But the U.S.-China trade war may be short-lived: The exit of U.S. firms from the Chinese outsourcing labor market will give competitors a greater advantage, and more wins in the end. South Korea’s Samsung could gain an advantage over Apple, for example. China’s large state capacity will make growth both feasible and stable. The share of exports in Chinese GDP growth has also declined steadily over the years.
Chinese politics has received much media attention recently, first over the elimination from the Constitution of the two-term limit for a president and vice president; second over the creation of new top positions and agencies, such as the National Supervision Commission, to battle corruption. We see policy continuity from these changes, with deepening reform. We view centralization as favorable for breaking regional and uncoordinated barriers, such as in pollution. And the anti-corruption campaign will benefit the economy. At least for the short and mid term, we view China’s political arrangements as favorable to its growth.
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