China : External and domestic tailwinds for growth but at a cost

Although China’s National Bureau of Statistics usually skips the releases of some macro data in the run-up and during Chinese New Year, available disclosure shows that China’s economy has been keeping its robustness in January and February. This has been clearly showcased by Caixin manufacturing PMI’s further improvement with close to the highest level in over four years. A quicker growth of exports and rising input costs are very important factors behind such trend.

On the export side, both US and Europe have been improving strongly while China has also gained some competitiveness on the exchange rate front, with CFETS RMB basket hovering around the lowest level since it was introduced in late 2015. On top of that comes the favourable base effect given the difficult start of 2016. Finally, China’s demand policies continue to be very loose. Although new RMB bank loan surprised the market on the downside (-19%YoY), total social financing – apparently a more comprehensive measure of financial conditions - hit a record high of 3700bn (+7.5%YoY) in January. However, there is no such thing as a free lunch. The acute increase in undiscounted bankers’ acceptance (+362%YoY to 613bn), as well as many other forms of shadow banking, point to more risky and unregulated lending flooding the Chinese economy.

Ample liquidity fuelled housing prices again, after the property market has experienced a few months of decelerated growth upon the enactment of cooling measures last October. Data shows slightly faster growth in January (0.4%MoM) compared with November and December, echoing our view that the impact of the regulatory tightening should not be overstated as liquidity has very few venues to be deployed with increasingly tight capital controls.

Looking ahead, such euphoria should remain after the nation’s two heavyweight meetings in March, namely Chinese People's Political Consultative Conference (CPPCC) and National People's Congress (NPC), in which Premier Li Keqiang is expected to give the growth target for 2017. In our opinion, the Chinese government will be able to meet an accommodating target, in line with the medium-term one of the Five Year Plan (average annual growth above 6.5%) as there are clear tailwinds ahead. However, let’s not forget that strong growth will also bring additional leverage on the back of lax monetary and fiscal policies