19 December 2018
China's consumer price index edged up 2.3 percent in March, lagging market expectations. Photo: Reuters
China's consumer price index edged up 2.3 percent in March, lagging market expectations. Photo: Reuters

China’s economy could be out of the woods this year

I was asked during an interview with CCTV on Friday whether China’s economy has bottomed out given encouraging economic data for the first quarter.

That came after Sheng Laiyun, a spokesman for the Chinese government’s statistics bureau, told a press conference that short-term recovery might face external distortions.

However, he said the economy will begin to settle down in the medium to long term.

I cited China’s gross domestic product, industrial growth, investment growth, external trade and various indices which showed signs of an uptick in the first quarter.

For instance, the purchasing managers’ index is back above 50 for the first time since August 2015 and the producer price index is up 0.5 percent, the first increase since January 2014.

The consumer price index edged up 2.3 percent in March, lagging market expectations.

That means China’s economy could be out of the woods this year.

In the meantime, the People’s Bank of China may reduce banks’ reserve requirement ratio once for the rest of the year given a more stable capital outflow.

Market liquidity should remain abundant with interest rates staying low.

Demand and production figures showed improvement in March, boosted by property and infrastructure.

Leading statistics and high-frequent data have turned around thanks to warming property and infrastructure sectors as well as a rebound in exports.

The uptrend is likely to extend into the second quarter. Inflation is expected to remain moderate in the short term.

However, it remains unclear whether the economic uptick is sustainable given some global uncertainties such as the pace of US rate hikes and inflation.

In addition, there is limited upside if the government solely relies on infrastructure and property.

The divergence between regions, industries and companies has worsened, according to the first-quarter data.

Northeastern China and other regions that depend heavily on traditional industries still lack growth momentum, with sectors led by steel and coal struggling with overcapacity.

By contrast, emerging industries such as logistics, pharmaceuticals and fast fashion are seeing robust growth.

That is a sign China is making progress in restructuring its economic growth model.

Meanwhile, housing stock, steel and coal output and company debt ratios have fallen.

We’ve seen rising government debt, which is in line with Beijing’s supply-side reform to reduce corporate leverage.

The government has established specific funds for infrastructure investment and set aside several hundred billion yuan for a program to employ workers laid off from inefficient industries.

The National Bureau of Statistics said the economic performance is stable and structural improvements are better than expected.

China added 3.18 million jobs in the first quarter, about 31.8 percent of the full-year target.

Inflation climbed 2.1 percent in the first quarter due to rising pork and vegetable prices.

Household disposable income grew 6.5 percent.

The tertiary industry now accounts for 56.9 percent of GDP, up 2 percentage points from the year before.

And high-tech and service industry investment growth rates are up 3 percentage points compared with overall investment growth while high energy-consuming investment continues to cool off.

This article appeared in the Hong Kong Economic Journal on April 18.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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