China’s economy responding to healthy policy stimulus

After several months in the doldrums, China’s economy is stabilizing as it starts to respond to fiscal and monetary stimulus. The impulse is also being amplified by improved sentiment as a trade deal with the US becomes more likely. Our analysis delves into China’s leading economic indicators and discuss how recent changes in the policy mix also bode well for long-term growth.

Last year, China’s aim to sustain both rapid growth and financial de-leveraging became ever more challenging amid several external headwinds. In fact, weakening global demand and heightened policy uncertainty associated with international trade conflicts have prompted the Chinese government to reverse course and gradually loosen monetary and fiscal policies. The results are starting to show as recently released Q1 GDP growth figures surprised on the upside, suggesting that the deceleration in growth has bottomed out for the recent cycle. GDP growth read 6.4% y/y in Q1, the same pace as in Q4 but beating consensus forecasts of 6.3%. On a seasonaly adjusted quarter-on-quarter annualized growth basis, the outcome looks more promising as the figures imply a 7.1% growth in Q1 2019 versus 6.0% in Q4 2018. This is in line with recent positive surprises in industrial production (IP) and retail sales data.

Leading indicators such as PMIs, lending activity and investments are pointing to further strengthening over the coming months. The manufacturing Purchasing Managers’ Index (PMI) figure bounced back to expansion mode or over 50 in March, after three months below 50 or what is generally considered contractionary territory. The improvement was even more pronounced for manufacturing small and medium enterprises (SMEs) and for forward looking new orders. Moreover, a positive stream of data started to also come from both broad credit growth and infrastructure fixed asset investment spending. Even exports to China from early-reporting Asian manufacturers are showing strong signs of stabilization. After being severely affected by the reversal of the so-called front-loading effect in US-China trade, i.e., US based companies increasing imports from China earlier last year to stock up before new tariffs come into effect. This is also reflected on a meagningful 2 point increase in the new export orders’ PMI in March, edging closer to expansion territory after falling into deep contractionary territory between October 2018 and February 2019.

Source: Qatar National Bank