1Q18 and March economic activity data review

1Q18 Real GDP growth came in at 6.8% YoY, while est. nominal GDP growth declined to 10.2% YoY. 1Q18 Real GDP growth is in line with the market consensus but lower than our expectation. On a sequential seasonally-adjusted basis, GDP growth remained on the soft side at 6.6% QoQ annualized, flat from 4Q17. Estimated nominal GDP growth declined to 10.2% YoY in 1Q18 from 11% YoY in 4Q17, as the GDP deflator declined to 3.2% YoY from 4.0% YoY in 4Q17 on the lower PPI. GDP by industry breakdown indicated that volume growth of the secondary industry accelerated to 6.3% YoY in 1Q18 from 5.7% YoY in 4Q17, but softened in tertiary industry. On the other hand, nominal growth slowed in both secondary and tertiary industries, with the former driven by more muted PPI inflation.

Headline industrial production (IP) growth retreated to 6.0% in March from 7.2% YoY in January ~ February, lower than the market consensus of 6.3%. On a sequential, seasonally adjusted basis, March IP growth moderated to 0.33% MoM from 0.57% MoM in January ~ February (non-annualized). The lower IP growth was largely driven by the neutralization of the late-LNY effect, which boosted YoY production growth in January ~ February at the expense of weaker growth in March. Meanwhile, electricity production growth declined sharply to 2.1% YoY in March from 11% YoY in January ~ February. Production of new energy car and industrial robots continued to outshine the rest with growth rates at 105.3% YoY and 34.4% YoY, marking continued mfg upgrade. Meanwhile, production growth of mining and metal remained resilient as new capacity (incentivized by strong profit last year) started to come on line.

Nominal retail sales growth picked up to 10.1% YoY in March from 9.7% YoY in January ~ February, higher than the market consensus of 9.7% YoY. Meanwhile, real retail sales growth came in at 8.6% YoY in March. It is worth noting that nominal retail sales growth of discretionary consumption items such as jewelry and cosmetics accelerated notably in March, which could be partially driven by a later LNY this year – we will continue to monitor the trend in 2Q to get a clearer read.

Reported nominal fixed asset investment (FAI) growth declined to 7.2% YoY in March from 7.9% YoY in January ~ February. Consequently, March year-to-date FAI growth came in at 7.5%, lower than the market consensus of 7.7%. Although the deceleration “makes sense” as PPI was notably lower in March than in January-February, we still suggest investors not to read too much into the headline FAI data due to severe data quality issues, and it is possible that monthly FAI growth may grow considerably slower than nominal GDP over an extended period of time. Sector wise: -

Property investment accelerated further to 10.9% YoY in March from 9.9% YoY in January –February, with leading indicators also picking up -- Property new start growth jumped to 17.8% YoY in March from 2.9% YoY in January - February, while property development source of funding growth declined to 0.1% in March from 4.8% YoY in January ~ February, mainly due to the slower growth of sales proceed—the deceleration in slower sales proceeds growth is in line with slower M1 growth. Meanwhile, both land transaction value and volume growth picked up notably in March, while property transaction volume growth remained resilient.
 

Infrastructure investment growth continue to slowed notably – March infrastructure investment growth dipped to 6.0% YoY in March from 11.3% YoY in January ~ February. The PPP project pipeline “clean-up” may have discouraged infrastructure investment since Nov. 2017. However, the first stage of the “clean-up” was due to conclude by the end of March 2018, and the overall pace of project execution has lagged that of the investment amount growth with project backlog piling up, which may point to a largely stable pace actual infrastructure investment execution this year.

Manufacturing investment growth edged down to 3.4% YoY in March from 4.3% YoY in January ~ February. The industrial capacity hasn’t expanded much during this round of reflation, while real interest rates remained conducive to investment growth.

On the other hand, private sector investment growth recovered to 9.5% YoY in March from 8.1% in January ~ February, while public sector investment growth declined to 3.4% YoY in March, in line with slower infrastructure investment growth.

Economic growth was kept at a moderate pace on sequential basis in 1Q, while tighter-than-expected fiscal and monetary policy settings in 1Q2018 may have introduced some uncertainties for cyclical momentum in the short term. We will continue to closely monitor the change in fiscal and monetary policy settings, in order to gauge the potential impact on growth and inflation going forward. While fiscal income recorded rapid growth of 13.6% YoY in 1Q2018, fiscal surplus has expanded YoY in January-February (which is contractionary to growth). Furthermore, fiscal expenditure growth may have slowed notably in March, judging from the 21% YoY jump in fiscal deposit growth. Weaker fiscal impulse and tightened financial conditions in 1Q may introduce some uncertainties to the cyclical momentum in the short term. We would continue to watch the change in adjusted total social financing growth and monthly fiscal balance, in order to gauge the policy changes on the fiscal and monetary fronts, as well as the consequent impact on growth and inflation. However, it is worth reiterating that from the medium-term perspective, China is still at the early stage of the reflation cycle, macro policy “mini-cycles” may introduce cyclical volatilities, but will unlikely reverse the medium term trend. Furthermore, fiscal and monetary policy has become more responsive to growth impulse over the past years, which works effectively to curb the downside and the duration of growth “soft-patches”.