China : 2017 concluded on a positive note

•  The world’s second-largest economy concluded 2017 on a positive note by expanding 6.8% in the fourth quarter. Consumption remained resilient, although its contribution to growth was reduced to 4% from 4.5% in the previous quarter, on the back of softer retail sales in December. As for investment, although industrial profits rose 21% in 2017 on supportive producer prices, it continued to decelerate especially in upstream ending the year with a relatively low contribution to growth (2.2%).
• On the external front, exports have recently experienced an improvement in December (10.9%YoY). However, the recent unilateral increase in import tariffs by Trump’s administration for washing machines and solar panels points to much more challenging times for China exports. Against this background, imports slowed to 4.5%YoY in December amid a less favourable base effect than for imports. Consequently, China’s trade surplus further increased to 54.7 billion USD from the previous 39.0 billion USD.
• The PBoC drained liquidity through OMOs in December and January to mop up the liquidity stemming from government deposits flooding into banks at year-end, but the RRR cut announced at December 29 helped moderate liquidity conditions as showed by softened interbank rates (especially at the short end). The RMB entered the new year with rapid appreciation against the backdrop of an even weaker dollar and supportive domestic environment. The one-way appreciation may continue in the near term as a potential line of defence for China against the increasingly worrisome outlook in terms of protectionist measures from the US and Europe. Still, we should not exclude some correction down the road, especially if the USD strengths.
• Down the road, we expect the deceleration of investment to be carried into 2018, with some downward pressure on the overall economy. As the policy-makers turn their focus to the quality of growth, demand arising from service sectors, technology innovation and environment protection should offset some losses from the old economy. All in all, we expect the growth to be solid at 6.5% in 2018 and further slow to 6.3% in 2019.

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