China economy: credit- driven rebound close to end amid policy shift


China economy: credit- driven rebound close to end amid policy shift
Growth momentum slows in April. After a strong pick-up in 1Q17, China’s economic recovery cycle gradually lost momentum in April, as the monetary policy shift along with property tightening and higher funding costs started to impact real economic activities. Both housing sales and auto retail sales weakened significantly, while overall fixed asset investment (FAI) and value-added industrial output (VAIO) also moderated in YoY terms. Looking ahead, we expect the economy to soften gradually with tightening financing conditions.

Housing sales moderating amid strict tightening policies. Commodity housing GFA sold increased 15.7% YoY in 4M17 after rising 19.5% in 1Q17 and 25.1% in 2M17, while YoY growth in contracted sales value slowed from 25.1% to 20.1%. More cities have tightened their property policies since the beginning of this year as it is a political obligation to curb housing prices ahead of the 19th Party Congress. The monetary authority and financial regulators have also implemented strict tightening over financing supply to the property sector in the recent two months.

With some time lag, however, property investment indicators have maintained strong momentum in the short term. 4M17 newly-started GFA grew 11.1% and GFA under construction rose 3.1%, compared with the increases of 11.6% and 3.1% in 1Q17. Property development investment grew 9.3% in 4M17, up from the increases of 9.1% in 1Q17 and 8.9% in 2M17. The growth in land area purchased increased 8.1% in 4M17 after rising 5.7% in 1Q17.

Looking ahead, we expect tightening policies to continue to restrain housing demand or sales in large cities in 2017. Lower-tier cities’ housing sales may see further stimulus momentum in the short term but slowdown may ensue in a few months. While property development investment may maintain strong growth in the next few months, gradual slowdown is inevitable ultimately. We expect GFA sold to decline more than 5% and property development investment to rise 5-6% in full-year 2017.

Marginal drops in manufacturing FAI and infrastructure investment. Capex demand in manufacturing industries has remained relatively weak although commodity inflation provides some support for related sectors. In 4M17, FAI in manufacturing rose 4.9%, down from 5.8% in 1Q17. FAI in mining declined 9.5% in 4M17 after dropping 7.1% in 1Q17.

As most industries still face overcapacity problems and demand may soften again, FAI in most industries may remain lacklustre in the short term. We maintain our full-year 2017 forecast for manufacturing FAI growth at 5-5.5%.

Infrastructure investment expanded rather rapidly over the past two years amid monetary stimulus, contributing much to the current economic recovery cycle. Nevertheless, economic recovery has started to soften amid policy shift and tightened regulations over local government borrowing activities. The YoY growth of infrastructure investment reached 18.2% in 4M17, below 18.7% in 1Q17 and 21.3% in 2M17 but still well above 15.7% in 2016. By sector, public utility services (production & supply of electricity, water & gas) FAI rose 1.2%; transport, storage & postal service FAI grew 16.7%; and water conservancy, environmental protection & public facility management service FAI climbed 27.5%, compared with corresponding 1Q17 gains of 2.6%, 17.8% and 26.9%. Looking ahead, the central government may maintain supportive financing policies for the infrastructure sector to offset probable housing market downturn. However, infrastructure investment can hardly pick up further due to the more conservative stance from the central government over local government debt expansion as well as cash-flow pressure in the thermal power generation industry. We maintain our forecast for infrastructure investment growth at 14-15% for 2017, compared to the actual growth of 15.7% in 2016.

Retail sales facing slowdown cycle. Retail sales rose 10.7% in April, down from the 10.9% rise in March. The sales of property-related consumer goods and those of autos gradually slowed. In April, the retail sales of household electric & video appliances, furniture, and construction & decoration materials respectively increased 10.2%, 13.9% and 13.4% after rising 12.4%, 13.8% and 17.8% in March. Meanwhile, after rising 8.6% in March, the retail sales of autos moderated to an increase of 6.8% in April. Furthermore, the pick-ups in commodity prices continued at a relatively rapid pace with the nominal retail sales of petroleum & related products gaining 12.1% in April after rising 11.3% in March.

VAIO declines with waning commodity inflation. Supported by the rebound in property investment, strong infrastructure investment and rising commodity prices, China’s value-added industrial output (VAIO) has picked up since 2016. However, as the property market and FAI start to soften, VAIO also faces downside pressure now.

In April, VAIO went up 6.5% after rising 7.6% in March. The VAIO of mining decreased 0.4% in April after dropping 0.8% in March. The VAIO of manufacturing climbed 6.9% in April, down from the 8% gain in March. The VAIO of public utilities increased 7.8% in April after rising 9.7% in March. The delivery value of exports increased 10.8% in April after rising 12.9% in March.

Looking ahead, we believe the downside risks may intensify in 2H17E with the gradual softening of the housing market and auto sales.