- The expansion was driven by robust services sector growth and export demand.
- State-driven FAI to counteract pressures from slowing property investment.
- Implication to forecast: We revise up our 2024 growth forecast from 4.5% to 5%.
Gross Domestic Product
We have upgraded our 2024 GDP growth forecast from 4.5% to 5%. Outbound shipment has proven resilient due to continued robust demand from the US, aided by a weaker Chinese yuan. The upswing of the global tech product cycle was another big driver of the export recovery. Domestically, infrastructure and manufacturing investment accelerated thanks to proactive state initiatives, counteracting pressures from slowing property investment.
An expansionary fiscal policy exemplified by a planned 6.6% budget deficit (incl. 3.0% of GDP for the general budget deficit, RMB1 trn in special central government bond issuance and RMB3.9 trn in special local government bonds) should help sustain this momentum. Growth was also bolstered by resilient consumer spending on services during the holiday period. Improving labor market conditions are expected to boost goods purchases going forward.
The official manufacturing PMI has rebounded into expansion territory at 50.8 for the first time in six months. Improvements in production and new orders sub-PMIs indicate a recovery in both supply and demand. The sustained expansion in Caixin PMI for six months suggests that SMEs are gaining traction. Encouraging signs have also emerged in the service sector. The NBS Non-Manufacturing PMI has risen to its highest level since mid-2023, reaching 53.0.
Retail sales
Retail sales growth stayed resilient at 4.7% in 1Q while slowing from 5.6% in Jan-Feb to 3.1% in March. Catering sales grew 10.8% YoY in 1Q. Latest mobility data on subway passenger volume and domestic flight operations show upward momentum. With consumption sentiment recovering, leisure-related items such as communication equipment and culture, sports, and entertainment soared 14.2% and 13.2% YoY YTD, respectively.
Consumption was important in boosting growth. Domestic traffic and revenue during the Qingming holiday exceeded the 2019 level by 12% and 13%, respectively, signalling improved consumer sentiment. Looking ahead, potential government support, such as subsidies for consumable upgrades, will lift retail sales growth in the months ahead.
Strengthening wages and labour demand also went some way to boost consumer spending. Average hiring salaries in 38 key cities rose 2.2% YoY in 1Q24, the first increase recorded since the start of 2023. The unemployment rate has fallen from 5.3% in the first two months to 5.2% in March but remained below the government’s latest target of 5.5%.
Fixed Asset Investment (FAI)
Proactive state initiatives counteracted the pressures of slowing property investment. SOE FAI growth reached 7.8% YoY YTD in March, exceeding the headline FAI growth rate by 4.5%. Government initiatives aimed at equipment renewal in strategic sectors are beginning to take effect, as evidenced by robust growth in manufacturing and tech hardware FAI. Within the manufacturing sector, railway, aerospace, aircraft, and equipment see the highest growth of 24.8% YoY YTD. Food processing and metal-related industries also recorded stronger growth than the rest. Among the high-tech service industries, investment in e-commerce services and information services increased by 24.6% and 16.9%, respectively.
Property investment has been a main drag since early 2022, experiencing a YoY drop of 9.5% in Jan-Mar. The floor space started has decreased by 27.8% YoY YTD due to the impact of unfinished homes. Real estate developers are prioritizing the completion of unfinished homes, resulting in a relatively smaller decline in completed floor space. As a result, the inventory turnover in 80 cities reached 29.9 months in February.
Industrial Production (IP)
Industrial production growth has retreated from 7.0% YoY to 4.5% YoY in March. However, it has accelerated by 6.1% YoY in 1Q24 from 4% in the full year 2023. In particular, high-tech manufacturing has increased notably by 7.6%. Chargers, 3D printing, and electronics have leapfrogged by 41.7%, 40.6%, and 39.5%, respectively. The acceleration in 1Q was largely due to improving outward shipments.
Export
Exports growth gradually improved from -1.2% YoY in 4Q23 to 1.5% in 1Q24 amid external demand upticks. The overall ASEAN manufacturing PMI has stayed in expansionary territory for the third consecutive month, while the US PMI also returned to above the breakeven 50 level in March.
Money supply
Deposit growth has decelerated from 8.4% YoY in February to 7.9% in March, marking the mildest YoY growth since Jan 2019. M2 growth has slowed from 8.7% YoY in Jan-Feb to 8.3% in March. M1 growth has returned to 1.1% after the seasonal effect in LNY. Liquidity condition, however, remains largely stable, evidenced by the narrowing gap between R007 and DR007 rates.
On the loans front, borrowing activities remain subdued due to elevated real funding costs. Loan growth has decelerated from 10.1% YoY in February to 9.6% in March, dropping below the 10% YoY level for the first time in nine years. New loans in both household and corporate have declined on both a monthly and year-to-date basis. The new increase in aggregate financing declined by 11.7% in March or 11.1% in the first quarter, indicating a tepid borrowing sentiment.
Inflation
March’s inflation data was weaker than anticipated. Consumer Price Index (CPI) has dropped from 0.7% YoY in February to 0.1% in March. Food prices have been the primary factor pulling down inflation, with pork and fresh fruit prices decreasing by 2.4% and 8.5%, respectively, due to increasing supply. On the demand side, core CPI has also declined from 1.2% in February (or 0.9% for Jan-Feb combined (recover to pre-LNY data level)) to 0.6% in March, reflecting a decrease in service prices after the holiday period.
PPI continued to contract, registering at -2.8% in March. The contraction is broad-based, with upstream costs like mining and raw material prices dropping by 3.5% and 2.9%, respectively. Notably, downstream prices, such as PPI in car manufacturing, fell by 1.5% due to intense price competition and overcapacity.
Rates
The 1Y MLF was kept unchanged at 2.50% on Monday. Policymakers are awaiting the effects of recent stimulus measures before considering another round of rate cuts. The PBOC’s decision was likely constrained by a potential delay to the Fed’s rate cut schedule, challenging its stable CNY exchange rate goal. Looking ahead, we expect the central bank to cut the 1Y MLF / 1Y LPR mildly by 10bps in 4Q24, which should limit the downside on CGB yields.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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[1] An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
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