Chinese GDP grew 6.9 percent in Q1, providing further evidence that economic growth is stabilizing following a gradual deceleration in GDP. Notable strength in the industrial sector boosted the headline number.
Chinese GDP Growth Stabilizing
Data released today reveal that Chinese GDP grew 6.9 percent in Q1-2017, slightly beating the consensus forecast which called for 6.8 percent. Over the last three quarters, Chinese GDP has grown 6.7 percent, 6.8 percent and 6.9 percent, representing an upward trend that has reversed the previous gradual slide in GDP growth rates (top chart).
While a breakdown of GDP into its demand components is not available at this time, examining the supply side factors can offer useful insights into the drivers of growth. Growth in the secondary industry, which includes mining/quarrying, manufacturing, construction and utilities production, rose to 6.4 percent year over year, following just 6.1 percent the previous quarter. The secondary industry accounts for roughly 40 percent of the value added in the Chinese economy. Growth in the primary industry, which includes agriculture, forestry and fishing slowed to 3.0 percent in Q1 from 3.3 percent in Q4. Likewise, growth in the tertiary industry, or the service sector, slowed to 7.7 percent in Q1 from 7.8 percent in Q4.
Strength in the secondary sector can partially be attributed to a rebound in overall investment spending, which increased 9.2 percent in March – its highest year-over-year rate of growth since May of last year. Investment in the Chinese housing market has shown a similar rebound, growing 8.9 percent in February of this year. Housing investment has been on a gradual upward trend since December 2015, reversing a slide in growth that began in mid-2010. The rebound in housing investment is not concentrated in a few select cities, but is rather a phenomenon across all three super-regions of China: Coastal, Central, and West regions (middle chart). The turnaround in housing investment has seemed to provide a boost to the construction sector, which is contained in the secondary industry. Although we do not expect housing investment growth rates to return to the 30 percent rates we witnessed during 2010-2011, continued government support for lending should buoy investment in the sector and for the foreseeable future.
No Longer Hemorrhaging FX Reserves
As we wrote in a previous report, the Chinese central bank was selling its foreign exchange (FX) reserves in an attempt to slow the depreciation of its currency. As a result, China’s FX reserves receded from nearly $4 trillion in mid-2014 to about $3 trillion today (bottom chart). In January of this year, China’s FX reserves dipped below $3 trillion for the first time since early 2011. However, concerns have started to dissipate after FX reserves reversed their outflows and increased in February and March, albeit at a very modest rate. Moreover, against the backdrop of a Fed that is in the midst of tightening rates, our currency strategy team expects the Chinese renminbi to depreciate, modestly, against the U.S. dollar.