4Q17 Real GDP growth came in at 6.8% YoY, while est. nominal GDP growth remained high at 11% YoY. 4Q Real GDP growth is in line with our expectation but higher than the market consensus of 6.7% YoY. On a sequential seasonally-adjusted basis, GDP growth came in at 6.7% QoQ annualized, largely flat from 6.8% QoQ in 3Q17. Estimated nominal GDP growth remained fast at 11% YoY in 4Q17 , compared with 11.2% YoY in 3Q17, as the GDP deflator edged down to 4.0% YoY from 4.1% YoY in 3Q17. In our view, 4Q GDP growth at 6.8% suggest robust underlying final demand (= domestic demand – changes in inventory) growth, and we believe there may have been notable drawdown of inventory level towards year-end, judging from the high-frequency data. We believe the underlying growth momentum is maintained, although 4Q17 headline numbers may have been “interrupted” by a few one-off “disruptive factors”—there are 2 less working days in 4Q17 vs. 4Q16; 2) earlier-than-usual environmental inspections have dampened output growth since August, 3) the 19th Party Congress held in October led to temporary slowdown of production and investment activities. GDP by industry breakdown indicated that volume growth decelerated in secondary industry but continued to pick up in tertiary industry. On the other hand, nominal growth held up at 12.2% YoY for secondary industry in 4Q, given elevated inflationary pressure of raw materials and intermediate goods.

Headline industrial production (IP) growth edged up to 6.2% in December from 6.1% YoY in November, higher than our forecast and the market consensus. On a sequential, seasonally adjusted basis, December IP growth accelerated to 0.52% MoM from 0.48% MoM in November (non-annualized). IP growth picked up despite the unfavorable working day effect, indicating robust end demand. Meanwhile, electricity production growth rebounded notably to 6.0% YoY in December from 2.4% YoY in November. Production of industrial robot and new energy continued to outshine the rest with growth rates at 56.5% YoY and 71.2% YoY. On the other hand, production restrictions continued to depress heavy-industry production growth such as cement (-2.2% YoY), glass (-5.3% YoY), and steel (-1.1%YoY).

Nominal retail sales growth declined to 9.4% YoY in December from 10.2% YoY in November, while retail sales volume growth stayed slowed to 7.8% YoY in December from 8.8% YoY in November. Retail sales growth of mobile phones recorded notable slow-down in December.

Reported nominal fixed asset investment (FAI) growth picked up to 7.2% YoY in December from 6.3% YoY in November. Consequently, December year-to-date FAI growth stayed flat at 7.2 % YoY, higher than the market consensus of 7.1%. We suggest investors not to read too much into the headline FAI data due to severe data quality issues. The leading indicators of FAI softened somewhat - FAI project new starts growth retreated to 6.2% YoY in December from 31% YoY in November; while FAI source of funds growth also declined to 8.8% YoY in December from 12.4% YoY in November. Sector wise:

Property investment slowed to 1.9% YoY in December from 4.8% YoY in November; meanwhile, growth of the property investment leading indicators showed mixed signals -- Property new start growth dropped to 8.6% YoY in December from 18.8% YoY in November; while land transaction volume growth also softened to 12.4% YoY in December from 43.1% YoY in November. On the other hand, property development source of funding growth edged up further to 12.6% in December from 10.6% YoY in November, and property transaction volume and value growth both accelerated further.

Infrastructure investment growth slowed to 6.7% YoY in December from 15.6% in November. We’ll wait for January-February data to gauge the trend, given that December infrastructure investment growth tends to be more volatile than usual.

Manufacturing investment growth jumped to 12.5% YoY in December from 4.1% YoY in November. The resilient nominal growth and continued recovery in profitability indicates further room for manufacturing capex cycle.
Meanwhile, private sector investment growth also accelerated visibly to 9.2% YoY in December from 4.8% in November, in line with the pick-up in mfg. FAI.

We expect Jan-February and 1Q headline growth numbers to fall on the strong side, given robust underlying demand and lean inventory levels heading into the New Year. High frequency indicators suggest a relatively strong start to the year, while leading indicators such as land sales and property new starts also suggest robust demand in the pipeline. We reiterate our view of continued recovery in consumption and mfg. capex demand, faster property investment growth, and better-than-expected infrastructure actual investment growth in 2018. In addition, there will be 4 more working days in January 2018 than in January 2017, reversing the negative impact the working day effect had on December data. Secondly, if we are right on solid trend of underlying demand, inventory restocking, or an end to inventory destocking, may boost growth on the margin. On the policy front, we expect a relatively benign regulatory environment and liquidity conditions heading into the Chinese New Year, especially considering the “contingent RRR cut” mechanism in place. Furthermore, based on the previous pattern, policy makers will likely “pause” and assess the potential impact of real economy first before proceeding with further initiatives, following the notable financial condition tightening in November-December 2017.