Has Chinese growth peaked?
Has Chinese growth peaked?
Chinese GDP surprised to the upside in the final quarter of 2017, coming in at 6.8% annual growth, unchanged from the previous quarter despite output restrictions aimed at controlling pollution and an ongoing credit crackdown.
For 2017 as a whole this meant growth of 6.9%, an acceleration from 2016. Nominal GDP slowed marginally but at 11% growth is still running at a robust pace, though still not outpacing credit growth. Deleveraging has yet to begin in earnest.
Higher frequency data for the year tells us something about where this growth came from. While retail sales growth was slightly lower in 2017 than in 2016, at 10.2% vs 10.4%, industrial production and fixed asset investment in particular posted strong recoveries from a turbulent 2016.
Industrial production accelerated to 6.6% from 6%, and fixed asset investment nearly doubled its 2016 rate to grow 6% compared to 3.2%. Meanwhile, exports were up 8.8% on their 2016 level, while 2016 had seen a 7.7% contraction.
The data seems to paint a picture of an economy supported by a strong external backdrop. This would also seem to be the reason for the stronger than expected final quarter; both trade and fixed asset investment picked up compared to the third quarter, even as retail sales and industrial production slowed.
Our own forecasts suggest continued strong growth for the rest of the world in 2018, so the export sector should continue to provide support for the economy even if an acceleration is unlikely.
Nonetheless, we still expect a deceleration in China this year. Nothing calamitous to be sure; we doubt GDP growth will fall far short of its likely 6.5% target. All the same, we would note that some domestic warning lights are flashing.
While leverage, as measured by debt to GDP, did not fall in 2017, the incremental growth of credit did slow quite considerably. The credit impulse has seen marked deceleration from 2016 levels, and feeds through to activity only with a lag. We are beginning to see this already with softer growth in real estate investment, and would expect this to continue for another six months or so, absent strong policy intervention which seems unlikely until there is a significant hit to growth.
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