More on China’s dodgy growth numbers

From Capital Economics this time:

• China’s economy stabilised in Q1 thanks to a marked improvement in activity last month. Admittedly, the latest surge in industrial production is hard to take at face value and is likely to be partially reversed in the coming months. And some downside risks to broader growth remain. But the big picture is that policy stimulus is clearly working and should help to shore up China’s economy in the coming quarters.

• GDP growth held steady at 6.4% y/y last quarter, marginally beating expectations (both the Bloomberg median and our forecast were 6.3%). Our own measure of growth, the China Activity Proxy (CAP), also held broadly steady last quarter, though it points to a lower expansion rate of around 5.3%. (See Chart 1.) We won’t get a detailed breakdown of GDP until tomorrow. But the headline breakdown suggests that an acceleration in industry offset a slowdown in service sector activity.

• The better-than-expected Q1 figures reflect a surprisingly strong March. Growth in industrial value-added jumped from 5.3% y/y to 8.5% last month (Bloomberg 5.9%, CE 5.6%). Our own industrial output index, based on the output volumes of key products, also surged, from 3.6% y/y to a five-year high of 6.3%. (See Chart 2.) It’s not entirely clear what is behind this strength. Growth in industrial sales for export edged up last month from 4.2% y/y to 5.7% but doesn’t stand out as especially strong.

• Domestic demand has picked up too, but likewise, the gains appear more modest than those in industrial output. Retail sales growth rose from 8.2% y/y to 8.7% (Bloomberg 8.4%, CE 8.3%). And fixed investment expanded 6.3% y/y in Q1 (Bloomberg 6.3%, CE 6.3%), up from 6.1% during the first two months of the year, implying a mild acceleration in March. This was driven by a pick-up in infrastructure spending which offset a slowdown in manufacturing investment. Headline property investment held broadly steady but growth in new property starts jumped from 6.0% y/y to 18.1%. Growth in property sales remained subdued, edging up slightly from -3.6% y/y to 1.7%.

• Stepping back, we suspect that the surge in industrial output growth last month may partly reflect seasonality or other distortions especially given that data published today show a decline in industrial capacity utilisation rates last quarter. Even so, there is no denying that China’s economy ended Q1 on a stronger note. Looking ahead, we still see some reasons for caution in the near-term. The front-loading of local bond issuance this year means that fiscal support will wane in the months ahead and property construction still looks ripe for a slowdown. But with credit growth now accelerating and sentiment improving, China’s economy will bottom out before long, if it hasn’t already.

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