Recent high frequency economic data in China is showing good momentum - and with growth of 6.9% in H1 17, the Chinese economy is clearly on track to outperform the ‘at least 6.5%’ economic growth target for 2017.
Earlier this year, President Xi Jinping of China stated that “China must maintain stable economic development and social harmony this year as the country and the Communist Party looks to ensure a successful party congress.” So far, President Xi is achieving his goal.
Q2 17 GDP data released this week showed annual economic growth of 6.9%/yr, unchanged from the pace of growth seen in Q1 17, and a touch higher than consensus expectations. With growth of 6.9% in H1 17, the Chinese economy is clearly on track to outperform the ‘at least 6.5%’ economic growth target for 2017.
As shown in the chart below, China’s annual GDP growth rate has been remarkable stable for the past few years – defying some market expectations of a marked slowdown and, indeed, gradually accelerating in the past 18 months or so.
Volatility lies beyond the official GDP data
There is plenty of scepticism about the veracity of the China’s official GDP data given how rapidly the data is produced. Indeed, Premier Li Keqiang has been reported to have stated that the official GDP numbers are ‘unreliable’ and that what he looks at to determine the economic performance is: rail cargo volumes, electricity consumption and loans made by the banks (WikiLeaks and Reuters, Dec 2010). To reflect these three key factors Bloomberg has created the Li Keqiang Index.
As shown in the chart below, the Li Keqiang index has shown significantly more volatility than the official GDP data over time. After being on a weakening trend through 2014-2015, the Premier Li index has been accelerating for the past year or so, reflecting the ongoing strength of the Chinese economy.
Signs of solid momentum in China’s economic growth
Despite what looks like a topping out of the Premier Li Index in early 2017, recent high-frequency economic data in China shows good ongoing momentum. Industrial production growth jumped to 7.6%/yr in June, up from 6.5%/yr in May, to be at its equal highest pace since late 2014, helped by rising exports as the global economy is in a cyclical upswing. Fixed asset investment (ex-rural) was steady at 8.6%/yr in June, while retail sales growth rose to 11.0%/yr in June, up from 10.7%/yr in May – and is at its strongest pace of growth since late 2015, led by auto sales.
In further good news, this solid pace of economic growth is being accompanied by modest inflation. CPI inflation is running at 1.5%/yr to June and expected to average around 1.8%/yr for 2017, before a modest rise to 2%/yr in 2018.
China GDP Growth Keeps on Keeping On
Source: Bloomberg, Data as at 30 June 2017.
A stable political setting remains key in 2017
The 19th National Congress of the Communist Party of China will be held later this year (probably around September-October-November). The Congress will be closely watched as it could result in a substantial change in the leadership of China – but with President Xi still firmly in place.
The top decision making body of China is the Politburo Standing Committee. There are currently 7 members of this Committee and 5 are expected to retire at the National Congress – due largely to age-based retirement conventions.
Thus, President Xi and likely Premier Li, will have the opportunity to be joined by 5 new members to the Politburo Standing Committee – which should see President Xi further cement his hold on power in China.
If 2017 is the year of ‘stability’ ahead of the 19th National Congress, financial market participants are likely to soon begin to focus on the post-Congress outlook for 2018 and beyond.
With reform and transition on the agenda, growth should remain strong, albeit at a slower pace
With concerns also remaining around elevated debt levels for State Owned Enterprises and further reform needed to help transition China’s growth from manufacturing and infrastructure investment to consumption led growth, President Xi will be kept busy in his second term. Given where China is at in its economic development stage and the underlying demographics of China, it would not be surprising to see the pace of economic growth in China slow in the years ahead – perhaps to around 6%/yr or slower.
However, even at this pace of real economic growth, nominal economic growth in China is expected to remain very strong and should continue to see China’s economic performance become even more significant for the global economy.