Economic Highlights (China) - 16/04/2014

China: GDP Growth Slowed to 7.4% yoy in 1q

• China’s real GDP growth slowed down to 7.4% yoy in 1q from 7.7% in 4q13. This was slightly lower than our forecast of 7.5% though higher than the consensus estimate of 7.3%. On a seasonally adjusted qoq basis, the economy expanded at a more moderate pace of 1.4% in 1q compared to a downward revised 1.7% in 4q, suggesting that growth had lost some momentum though the extent of the slowdown remained modest. On the supply side, tertiary industry, which accounted for 46% of China’s economic output in 2013, led the 1q expansion with a 7.8% yoy growth after recording 8.3% in 2013. The secondary and primary industries grew by 7.3% and 3.5% yoy in 1q, slowing from 7.8% and 4.0% last year. A slowdown in industrial production from 10.0% yoy in 4q13 to 8.7% in 1q contributed much to the moderation in GDP.  

• On the demand side, the weaker economic growth mainly reflected a slowdown in investment and weaker external demand, while consumption remained broadly stable. Urban fixed asset investment (FAI) ytd grew 17.6% yoy in 1q, significantly lower than 19.6% in 4q and 20.9% in 1q13, mainly due to slower investment in manufacturing and real estate industries. Exports meanwhile contracted by 3.4% yoy in 1q, weaker than an increase of 7.4% recorded in 4q, partly affected by inflated trade activities in the first four months of last year, which have distorted the base of comparison. Retail sales in real terms increased by 10.9% yoy in 1q, compared to 11.5% for the full year of 2013 but marginally higher than 10.8% in the same period a year ago.

• The latest data signalled that investment in the real estate sector moderated further in Mar, while transportation investment ytd also slowed and construction sector investment contracted. Growth in real estate investment ytd – which accounts for about 20% of total investment – decelerated from 19.3% in Feb to 16.8% yoy in Mar, with the growth of residential property investment ytd slowing from 18.4% to 16.8% yoy. Investment growth in commercial buildings also eased from 27.1% yoy, ytd in Feb to 20.8% in Mar. Growth in transportation investment ytd meanwhile moderated from 21.1% in Feb to 20.4% yoy in Mar, as both railway and road transportation investment eased slightly. In contrast, FAI growth in the primary sector picked up from 20.9% in Feb to 25.8% yoy, ytd in Mar, while manufacturing investment growth ytd – which accounts for about 35% of total urban FAI – increased marginally from 15.1% in Feb to 15.2% in Mar, as faster investment in sectors such as transport equipment, electrical machinery and equipment, chemicals, general equipment, as well as rubber and plastics partially offset slower investment in the automobiles, smelting of ferrous metals, pharmaceuticals, food and beverages industries.

• Meanwhile, industrial activity rebounded slightly in Mar. Growth in industrial production rose to 8.8% yoy (OSK-DMG: 9.1%, consensus: 9.0%) from 8.6% in Jan-Feb, helped by marginally stronger growth in electricity, gas and water, as well as manufacturing output while mining production moderated slightly. Among the major industrial products, the output growth of electricity rose to 6.2% yoy from 5.5% in Jan-Feb, while the output of cement and steel products increased by 5.9% and 5.0% yoy compared to 2.4% and 4.9% in the first two months. The production of automobiles, on the other hand, slowed down to 7.3% yoy in Mar from 12.5% in Jan-Feb.

• Nominal retail sales rose 12.2% yoy during the month, broadly in line with expectations (OSK-DMG: 12.2%, consensus: 12.1%), and up from 11.8% in Jan-Feb. Growth in retail sales in real terms remained stable at 10.8% yoy, the same as in Jan-Feb. In terms of commodity, there was a pickup in sales growth for automobiles, petroleum products and communication appliances, while sales of foodstuff, garments and footwear, cosmetics and medicines moderated slightly. Sales of items related to the property sector, such as furniture, building and decoration materials and household appliances also accelerated. The sales of gold, silver and jewellery, however, dropped 6.1% yoy compared to an increase of 9.3% in Jan-Feb. The sales revenue of large catering enterprises, on the other hand, increased for the first time in more than a year, up 4.2% yoy in Mar, suggesting that the negative effects of the government’s frugality campaign on high-end catering and restaurants may be fading.  

• The latest credit data, on the other hand, suggested positive credit and financing conditions overall despite slowing broad money supply growth. Total social financing, the economy’s broad measure of liquidity, jumped to 2.07 trillion yuan in Mar, more than double the 938.7 billion yuan in Feb. New loans also increased by 1.05 trillion yuan, significantly higher than the 644.5 billion yuan seen in the prior month. The lower M2 growth, which fell to 12.1% yoy in Mar from 13.3% in Feb, partly reflected a higher base last year and does not necessarily signal a tighter monetary stance, in our view.

• Overall, today’s data confirm that the economy has slowed in the first quarter, mainly due to weaker-than-expected global demand and slower domestic economic activity. Although 1q GDP growth slightly disappointed on the downside, we have maintained our growth forecast of 7.8% for this year. Recent data suggested that external demand might have started to improve, with new export orders rising in Mar again after declines in the past three months. China’s labour market has also remained fairly resilient, with real urban and rural disposable incomes continuing to rise by 7.2% and 10.1% yoy in 1q, which are more favourable than 6.7% and 9.3% in the same period last year. Stable employment and continued income growth will remain a key support for household consumption ahead.

• At the same time, muted inflation provides room for policy adjustments to support growth, as indicated by the government’s recent announcement on 2 Apr to extend tax breaks for small businesses and accelerate railway investment and urban redevelopment. Looking forward, there is still scope for the government to increase fiscal spending and provide more tax support to sustain growth. We believe the authorities may announce additional pro-growth measures in case of further downturn, as the government has repeatedly stated that it will make sure growth does not fall below a certain “lower limit” in order to ensure steady growth and employment. These support could include further spending on affordable housing construction, social sectors, agricultural development, basic infrastructure, selective tax cuts, and speeding up of more far-reaching reform measures to boost domestic demand, while a loosening of monetary policy is less likely, in our view. For now, we expect growth to stabilize and regain momentum in 2q, with the supportive fiscal policy and expected gradual recovery in external demand.

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