China's stronger-than-expected Q4 GDP is evidence of a cyclical stabilisation in the economy. However, medium-term risk factors have led to a cautious view about the Chinese economy, particularly in the second half of 2020, with full-year growth forecasted to drop to 5.8%, says Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers (AXA IM).
The stronger than expected Q4 GDP adds to growing evidence of a cyclical stabilisation in the Chinese economy.
The hard-hit sectors – by the trade war and global manufacturing turndown – have in fact spearheaded a decent recovery thanks to receding trade tensions and a frontloading of government stimulus.
We think this positive momentum has further to run, creating a strong start for the economy in 2020. However, the medium-term growth pressure has not subsided completely and could drive a renewed growth slowdown beyond the near-term respite.
The cooling housing market is a key internal headwind, which has started to weigh on construction activities, opening the door for a long overdue correction in real-estate investment in 2020.
Externally, the partial trade deal – notwithstanding its near-term positive impacts – should not mask the long-lasting structural challenges between the US and China, which pose risks to not only the sustainability of the trade truce but also bilateral relations in technology, investment, finance and much more.
Accounting for these factors has led to our cautious view about the Chinese economy, particularly in the second half of 2020, with whole-year growth dipping below 6%. But given our forecast (of 5.8%) is likely below Beijing’s upcoming growth target of “around 6%”, we do see risks tilting slightly to the upside.
The Chinese economy ended 2019 on a firmer note. A visible rebound in industrial/manufacturing activity helped to keep headline growth stable at 6% on par with Q3. That leaves whole-year growth at 6.1%, in line with our forecast (due to rounding) and Beijing’s growth target of 6-6.5%.
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Few surprises are found in the GDP breakdowns. The tertiary sector continued to deliver solid performance, expanding at 6.9% yoy, outpacing that of the industrial sector by 1.2ppt. But it was the sequential acceleration of the latter – to 5.7% from 5.6% – that accounted for the most of the upside surprise in Q4 GDP.
The expenditure composition shows continued solid growth from consumption, but the investment contribution picked up in Q4. The balance of growth may shift further in Q1-2020 , but not enough to alter the structural trends in the economy.
Today’s GDP data largely confirms a nascent recovery in manufacturing and industrial-sector activities. Both the official and Caixin PMIs have been above 50 for a few months, with production indices firmly in expansionary territory. Industrial production growth also rebounded strongly to 5.9% in Q4 from 5%, thanks to improved corporate profitability and rising factory-gate prices.
With inventory levels at multi-year lows, improved end-demand and easing trade tensions could strengthen the growth momentum further in the coming months.
Part of this growth impulse has come from offshore. China’s export growth quickened noticeably in the final month of 2019. While the base-effect has flattered the outturn, we see enough corroborating evidence of the global trade cycle bottoming from other export bellwethers in the Asia region.
As the US and China have now sealed their Phase One deal, dissipating trade uncertainties could also add strength to the global recovery. We expect China’s exports to resume growth in 2020, although its contribution to GDP could be hampered by increased imports from the US.
Compared to the brightened external picture, the domestic economy appears to be steady-as-she-goes. Consumer spending held its ground, maintaining a 8% growth last month, despite the record Single Day sales (in November) brought forward consumptions of big-ticket items. The latter could also be a result of lower turnovers in the housing market, which has started to weigh on real-estate (RE) investment. A long-overdue downturn in RE investment could play out in 2020, making it a key drag for the economy.
Luckily, capex spending by manufacturers has picked up – growing at 3.1% in December – supported by improved confidence, profitability and recovering tech demand. We also expect the current soft patch in infrastructure investment to give way to a modest recovery in 2020 thanks to increased government supports. Overall, better manufacturing and infrastructure FAIs should help to offset weaker real-estate construction, keeping total FAI growth broadly stable in 2020.
Overall, today’s data adds to the growing evidence of a stabilising economy, with various cyclical sectors spearheading a nascent recovery. Together with easing trade tensions, the improved macro backdrop has given a boost to financial markets.
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Beyond the short-term respite, however, we think various structural impediments will return to the fore and cause a renewed growth slowdown in the second half of the year. This will open the door for more aggressive policy easing, with the PBoC resuming RRR cuts and Beijing adding fiscal supports for infrastructure investment.
We also think the risks of the Sino-US trade dispute resurfacing later in the year should not be underestimated, given the aggressive purchase commitment to which China has agreed. The latter, if it is fully realised, will more than double China’s imports from the US over the coming two years. With no chance that this can be fulfilled by a natural demand increase, China will have to either divert imports from elsewhere – which could risk antagonising other trading partners – or substitute for domestic production – which will slow economic growth. Neither outcomes will be ideal for China, and the question is – will Beijing insist on pleasing the US by sacrificing its relations with others and/or enduring slower growth?
Finally, with no signs of easing tech restrictions and continued geopolitical disputes, confrontations between the US and China in other fields could spill-over to trade, hampering the willingness of both sides to honour the agreement. These are the key reasons why we are cautious about the sustainability of the trade truce, and worried that the markets and economy may be vulnerable to a snapback of tensions later in the year.
Factoring in some of the aforementioned risk factors has led to our prudent view about the Chinese economy, where we anticipate a solid H1 to give way to renewed weakness in H2, with full-year growth at 5.8%.
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