China: Strong growth conducive to deleveraging – Standard Chartered

The research team at Standard Chartered explains that China’s GDP grew 6.9% y/y in Q1-2017, beating the market estimate of 6.8% as industrial production (IP), fixed asset investment (FAI) and retail sales all accelerated year-on-year in March, confirming the strong start to the year.

Key Quotes

“Q1 growth has benefited from steady services-sector growth (7.7% y/y), a favourable inventory cycle from destocking to restocking, a rebound in exports, and a rapid increase in fiscal spending. The Q1 result has built a comfortable cushion for the government to achieve its annual growth target of around 6.5%, in our view.”

“With the risk of a hard landing receding, a tightening monetary policy bias is likely to remain, largely to contain financial risks and reduce capital outflow pressure. The People’s Bank of China (PBoC) has been withdrawing liquidity since the Lunar New Year and has raised de facto policy rates (on reverse repos, for example) twice already in Q1. Credit growth has slowed and market rates have risen partly as a result of this. More generally, financial regulation has been tightened. We think the authorities will focus on deleveraging as long as growth remains above 6.5%. We expect the PBoC to raise de facto policy rates by another 20bps this year to ease capital outflows.”

“The debt-to-GDP ratio is likely to increase less in 2017. China’s total debt ratio increased by more than 10ppt in 2016, and exceeded 260% at year-end, according to our estimate. More recently, credit growth has been decelerating towards the annual target of 12%. On the other hand, nominal GDP growth is likely to exceed 10% this year (11.8% y/y in Q1). The gap between credit and nominal GDP growth is narrowing, a pre-condition for eventual deleveraging.”