China growth stabilizing thanks to the ongoing stimulus but now with a more wary PBoC

Chinese economy seems to have stabilized with GDP growth rate reaching 6.4% YoY in the first quarter of 2019. While the data looks inspiring at first sight, a deeper reading of the underlying components brings us a less optimistic picture. The caution of our reading has been well reflected in April’s PMI data, which indicated less optimistic sentiment compared to last March. In particular, two of the major internal demand factors, namely, domestic consumption and private investment, have slipped further for the whole quarter. Fixed asset investment has remained generally robust but mainly supported by infrastructure and real estate sectors, which have been benefitting from the ongoing stimulus program. As regards trade, exports have rebounded in March after experiencing a sharp decline in the previous month. However, import growth has continued to fall for four consecutive months, reflecting a still muted domestic demand. Overall, the growth data suggests some stabilization of the cyclical slowdown but it is clearly far from a full-fledged recovery. There has also been increasing concerns about China’s inflationary pressure as the consumer price index surged in March. We believe the concerns are overstated as most of the increases in CPI were pork-related while core inflation remained nearly unchanged. The overall liquidity, as reflected in total social financing, has ballooned, surpassing 208 trillion yuan in March, in line with our call of a better working transmission mechanism as the central point of the government stimulus. This has helped keep money rates low until recently but the situation is quickly changing since mid-April. It might be related to a potential PBoC’s shift towards a less expansionary stance. Also long term rates have shifted up substantially, with the long-term (10 year) government bond yield reaching 3.4% thanks to better prospect of economic recovery and higher expected inflation. All in all, we expect the Chinese economy to gradually move onto a stabilizing trajectory, with infrastructure and real estate being again the key drivers of the recovery. The faster the recovery, though, the more likely the PBoC will shift gears to avoid potential overheating. For the time being, the PBoC is likely to take a wait-and-see approach for policy adjustment based on the pace of future growth. As such, we maintain our growth forecast of 6.3% for 2019.