Chinese GDP surprises but fixed asset investment a risk

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From Westpac’s Elliot Clarke:

Chinese GDP surprised to the upside in the December quarter, albeit only at the margin. Following three consecutive annual gains of 6.7%yr, in the December quarter, annual growth came in at 6.8%yr. The quarterly gain was in line with market expectations at 1.7%, as was year-to-date growth, 6.7%.

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Growth in 2016 therefore matches that of 2015 and is only modestly below 2014 (7.2%yr). Unsurprisingly though, it is much weaker than growth to end-2013, when domestic and (often) external conditions were more constructive.

The December quarter outcome is pleasing but hardly unexpected. As we have highlighted on numerous occasions, authorities are keen to maintain an accommodative policy stance ahead of November’s National Congress. This is evident in the ongoing improvement in real estate construction and continued strength in key infrastructure spending as well as robust growth in services.

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On the latter, it is particularly noteworthy that nominal growth in the services sector has been sustained near 11%yr in 2016 despite a significant moderation in financial sector growth. Available to September, real estate services and, to a lesser extent, wholesale and retail activity have clearly stepped up.

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Also worthy of note from the nominal sectoral GDP data is that momentum in the secondary sector has firmed through late-2015 and 2016. From a low of 0.4%yr at September 2015, it has since risen to 9.1%yr.

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This in part comes as a result of greater real estate investment, growth in fixed asset investment in the sector having risen from 1.0%yr at December 2015 to 6.9%yr currently. However, it has also come as a result of the materially improved health of manufacturing, which is benefitting from domestic construction and consumption as well as firming external demand.

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Given the rapid rise in commodity prices, it is unsurprising that the implicit price deflator has jumped higher. Having troughed at –0.9%yr in September 2015, it has now bounced back to 2.6%yr at December 2016.

The key point of caution to draw from the available GDP and investment detail is that, outside of residential real estate, investment in China continues to depend on the public sector, specifically the central government. Though it looks to have based, private investment in capacity remains historically weak. Past the Congress at year’s end, if sustained this trend will be a clear risk to growth.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.