China: Economic activity showing signs of stabilization - BNPP

China’s economic performance seems to have turned a corner this year, with better leading indicators and improved inflation performance in the industrial sector as noted by the analysts at BNP Paribas.

Key Quotes

“A key factor behind this has been huge public-sector stimulus. Not only has the People’s Bank of China been expanding its domestic assets quickly – for example, by lending to policy banks – but local authorities have also stepped up investment. Thus, we have a double whammy of aggressive fiscal and aggressive monetary policy. It seems to be working.”

“The key question is whether or not the growth impact will fade if fiscal stimulus is not repeated. That is a distinct possibility, so we expect policy to continue to be expansionary. This view is reinforced by the fact that stability is a priority at the 19th Party Congress in autumn 2017. Fiscal policy is likely to remain aggressive.”

“Chinese economic activity has stabilised since Q2. Industrial production growth has stayed at 6% y/y, thanks to improved fixed-asset investment. Investment in infrastructure and property has picked up, but consumer demand has slowed. We expect GDP to print 6.7% growth in 2016, 6.2% in 2017 and 6.4% in 2018.”

“With structural change still ongoing, imports should remain quite soft, but the trend is improving in our forecast – good news for global trade and other countries’ exports. After falling by 6.3% in 2016, imports will rise by 2% in 2017, we expect, and by a more solid 4% in 2018.”

“While the period of falling producer prices is probably behind us, we expect manufacturing price inflation to remain on the soft side. After a 1.8% fall in the PPI in 2016, we estimate, there should be a 1.3% rise in 2017 and a modest increase to 1.5% in 2018. CPI inflation is projected at 2.3% in 2017 and 2.5% in 2018, after 2.0% this year.”

“The risks to Chinese growth would seem to be external uncertainty and currency concerns linked with an appreciating dollar and rising US interest rates – external outflows could tighten domestic monetary policy, as could any tendency for the RMB to rise alongside the USD against other trading partners. Our forecast for USDRMB is for it to end this year at 6.95, rising to 7.40 at the end of 2017 and falling back to 7.02 at the end of 2018.”