Schroders : Has Chinese growth peaked?

The final quarter rounds off a strong year for Chinese growth, comments Craig Botham, Schroders Emerging Markets Economist:

'Chinese Gross Domestic Product (GDP) surprised to the upside in the final quarter of 2017, coming in at 6.8% annual growth, unchanged from the previous quarter despite output restrictions aimed at controlling pollution and an ongoing credit crackdown.

'For 2017 as a whole this meant growth of 6.9%, an acceleration from 2016. Nominal GDP slowed marginally but at 11% growth continues to rise at a robust pace, though it is still not outpacing credit growth. Deleveraging has yet to begin in earnest.

'Higher frequency data for the year tells us something about where this growth came from. While retail sales growth was slightly lower in 2017 than in 2016, at 10.2% vs 10.4%, industrial production and fixed asset investment in particular posted strong recoveries from a turbulent 2016. Industrial production accelerated to 6.6% from 6%, and fixed asset investment nearly doubled its 2016 rate to grow 6% compared to 3.2%. Meanwhile, exports were up 8.8% on their 2016 level, while 2016 had seen a 7.7% contraction.

'The data then seems to paint a picture of an economy supported by a strong external backdrop. This would also seem to be the reason for the stronger than expected final quarter; both trade and fixed asset investment picked up compared to the third quarter, even as retail sales and industrial production slowed.

'Our own forecasts suggest continued strong growth for the rest of the world in 2018, so the export sector should continue to provide support for the economy even if an acceleration is unlikely.

'Nonetheless, we still expect a deceleration in China this year. Nothing calamitous to be sure; we doubt GDP growth will fall far short of its likely 6.5% target. All the same, we would note that some domestic warning lights are flashing.

'While leverage, as measured by debt to GDP, did not fall in 2017, the incremental growth of credit did slow quite considerably. Credit growth has seen a marked deceleration from 2016 levels, and feeds through to activity only with a lag. We are beginning to see this already with softer growth in real estate investment, and would expect this to continue for another six months or so, absent strong policy intervention which seems unlikely until there is a significant hit to growth.'

For further information, please contact:

Schroders

Andy Pearce, Institutional Tel: +44 (0)20 7658 2203 / andy.pearce@schroders.com

Charlotte Banks, Intermediary Tel: +44 (0)20 7658 2589/charlotte.banks@schroders.com

Lucy Cotter, International Tel +44 (0)20 7658 3365 / lucy.cotter@schroders.com

Notes to Editors

Important Information: The views and opinions contained herein are those of Craig Botham, Emerging Markets Economist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.