China’s first-quarter GDP: 4 things to watch next week

On Monday at 05:00 GMT+3, China’s National Bureau of Statistics will release its estimate for the country’s first-quarter economic growth.

Last month, Li Keqiang, China’s premier, predicted that gross domestic product would increase “around” 6.5 per cent for the full year, compared with 6.7 per cent for 2016.

But China’s officials say they are not yet worried by ever slower economic growth, and argue that a “new normal” of more balanced expansion is needed as they try to wean the economy off its traditional reliance on credit-fuelled investment.

Here are four things to look out for ahead of next week’s data release.

Upside risk, but at what cost? 
Many analysts expect that first-quarter growth will come in comfortably above 6.5 per cent as the ruling Chinese Communist party prioritises economic stability and job creation ahead of an end-of-year leadership reshuffle that will mark the beginning of President Xi Jinping’s second five-year term.

But many also worry that this relatively robust performance is only increasing the likelihood of a financial and economic reckoning in the early years of Mr Xi’s second term.

Credit continues to grow at more than twice the rate of the underlying economy. The country’s overall indebtedness is creeping towards 300 per cent, most of it concentrated in the corporate sector.

State-private sector divide 
Chinese government officials concede privately that the country’s debt problem is principally a state-sector problem.

Last year, investment by state-owned enterprises surged by about 20 per cent year on year, while private-sector investment was anaemic.

Monday’s data should show whether China’s private companies are regaining their animal spirits or remain pessimistic about the near-term prospects for their businesses.

Inflation
The country’s state-dominated heavy industrial sectors have been buoyed by a rapid turnround in producer prices over the past six months. Producer price inflation turned positive in September for the first time in five years, and quickly climbed to a nine-year high of 7.8 per cent in February.

The PPI figure moderated last month and consumer price inflation remains below 1 per cent. Few analysts expect a sustained inflationary surge that could force China’s central bank to raise interest rates.

But the People’s Bank of China is under pressure to stem capital flight and steady the renminbi’s slow but steady slide against the dollar, a task made harder by the US Federal Reserve’s recent interest rate rises, with more to follow.

Bubble trouble
Real estate investment figures should show whether measures to contain runaway housing prices in China’s most desirable cities are having their intended effect.

Last year, the Communist party issued guidelines that declared: “Houses are for living in, not speculating”.

Many other cities, however, are burdened with many years’ worth of unsold housing stock.

In an effort to address these two dilemmas, earlier this month China’s housing ministry ordered cities with more than three years’ housing supply to halt land sales. Cities with less than a year’s supply must increase land sales.

But the consistently large increases in China’s money supply over the past decade have made it difficult to eradicate the investment manias that break out periodically across the country.

This month, President Xi Jinping designated an area 50km south of Beijing as a premier new investment zone. The announcement’s most immediate, and unintended, consequence was a surge in property sales that ended only when the local government simply banned real estate transactions.

Monday's data will be key to the market and will have a major impact on the market. In worse data than expected, the indexes are likely to decline, and vice versa, with better data, the indices will find a new economic outlook for growth.

Source: Financial Times

Jr Trader Petar Milanov

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