1. What’s The Policy Focus For The Year?
The outlook for the rest of 2018 remains neutral and risk prevention is well underway. The consistent message from political leaders is reform, including a push for tougher financial regulation and further deleveraging.
What Does This Mean For Monetary Policy?
Monetary policy has shifted neutral, following concerns of rising trade tensions and some softer economic data from developed markets. The outlook for the benchmark policy rate is to remain unchanged in 2018.
full year growth forecast is
2. Will This Affect The Growth Outlook For The Year?
There has been a misconception that President Xi Jinping’s push for “putting quality first” will translate into tolerating much lower growth, but this is not the case. First quarter GDP picked up modestly to 6.9% quarter-on-quarter annualized, when seasonally adjusted. There will likely be a modest slowdown for the rest of 2018, but the full year growth forecast is still 6.7%, just below 6.9% in 2017.
Real GDP, % change
China contribution to headline GDP growth
3. What About U.S. Trade Tensions?
The ups and downs in U.S.-China trade negotiations have been big news this year, with the story driving market sentiment. The Trump administration released its Section 301 report in March, with plans to impose 25% duties on at least $50 billion in Chinese goods. Beijing swiftly responded with a list of duties on key American imports, which led President Trump to threaten further tariff actions on an additional $100 billion in Chinese goods. Besides tariffs, the Section 301 report includes U.S. allegations of China’s inadequate intellectual property protection, unfair licensing and technology transfer policies, and overseas investment by Chinese corporations. Just a few days ahead of the deadline for Section 301 tariff action, both sides agreed to take measures to reduce the bilateral trade imbalances and the proposal for tariffs and investment restrictions for Chinese companies were put on hold. Under the agreement, China planned to significantly increase its purchase of U.S. goods (including agriculture and energy products) and services, and speed up relevant amendments to its laws and regulations to protect intellectual property rights. A few days after, China announced plans to reduce import duty on autos and auto parts and a range of consumer goods. The White House has since back-tracked and announced June 15 as the date for the possible implementation of 301 tariffs and June 30 as the date for unveiling investment restrictions. Risks moving forward are unclear, as the gap between the two sides remains large. The conflict is not only on trade imbalances, but also covers investment, technology, “Made-in-China 2025”, as well as the long-term strategic relationship between the two largest economies in the world.
Goods imports from China
Goods exports from China
4. How Will The Debt Question Evolve?
China’s high debt has been a hot topic for investors, with total debt amounting to 268% of GDP – twice the emerging market average, but slightly below the developed market average. Deleveraging efforts have made encouraging progress, with estimates showing China’s debt stabilized in 2017 for the first time since 2011. Corporate debt remains the biggest concern, as China has the highest among major economies. But credit risks should be contained as growth remains solid and real estate, which is widely used as bank loan collateral, has so far avoided sharp falls.
Corporate debt as a percentage of GDP
5. What Are The Sectors To Watch?
Tech and the consumer
While Chinese exports are still booming, there has been a shift to a more consumption-driven economy. Consumer sales are expected to grow around 11% year-on-year in 2018 with ROE of around 14% thanks to three critical trends: premiumization, a jump in consumer credits and “the new retail”, where businesses are integrating offline with e-commerce. Chinese consumers now prefer to pay more, but buy less and are more focused on quality, design and good service. Credit cards and online lending are boosting shoppers’ spending power, with consumer credits (ex-mortgage & auto loans) predicted to account for 58% of China’s overall retail sales (ex-auto sales) in 2020. This is up from 40% in 2016 and not far behind 49% in the U.K and 67% in the U.S. in 2016. Chinese online retailers have also been proactively combining brick-and-mortar with online elements and benefiting from shared data, with the likes of Alibaba, Tencent and Hema all stepping up their investments.
Consumer sales are
expected to grow
year-on-year in 2018
Healthcare was the best performing sector in Q1, thanks to upbeat sales and earnings, with Wuxi Biologics leading the way. The government has also just announced measures to support research and development of generic drugs and is proposing tax cuts of up to 25% for drug makers, which is likely to give the sector an extra boost this year.
Ranked sector returns for March and Q1 (%)
After a surprisingly resilient 2017, the boom in the Chinese property market has cooled and overall housing transactions have slowed. While modest easing is expected in housing activity for the rest of 2018, growth is still expected to be stable. Real estate investment is expected to slow to an average growth pace of 4% in 2018, compared to around 7% in 2017 and national home sales volumes are also set to fall. After a notable increase in land sale area in 2017, growth in new housing starts - a leading indicator for real estate investment - is expected to ease slightly, but should still post moderate growth this year.
Forecasts of housing market activity
6. What Could Rock The Boat?
On the macro side, the key sources of risk are the housing market and the U.S.-China trade relationship, as mentioned above. The financial risks to watch out for are the pace of deleveraging and a sudden or sharp rise in inflationary pressures. So far, both risks appear contained.
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