Price recovery coming for China as services leads growth

SINGAPORE – China’s headline Q4 GDP grew stronger than expected, signalling a price recovery cycle, according to ANZ Bank. The number came in at 6.8% y/y, or 1.7% q/q on a seasonally adjusted basis.

“Based on the available data so far, the GDP deflator implied for Q4 was 116 (2015=100), a sharp increase from 101 in the first three quarters,” ANZ says. “This is consistent with the uptrend in the producer price index (PPI) in H2 2016, which we believe is more relevant to the recovery in China’s business cycle.”
ANZ says that, on the surface, China’s growth seems to be driven by the services sector, which contributed 3.9 ppt towards 2016’s GDP growth of 6.7%.
“For the year, the services sector’s share of GDP in China rose to 51.6%, surpassing the secondary industry for the fifth consecutive year. Retail sales jumped 10.9% y/y in December, the strongest in 2016, thanks to increased consumption of cosmetics, jewellery, and daily necessities.
“Overall, the numbers seem to support China’s ongoing transition from a manufacturing-led to a services-led economy.”   
ANZ says it expects China to widen its growth target to 6.0-7.0% in 2017, providing more flexibility for policymakers in trying to strike a balance between promoting structural reforms and maintaining economic confidence.
“In our view, however, China’s economic stability is anchored with a steady price recovery. Therefore, we will continue to pay close attention to the PPI and evaluate whether the improving momentum, driven by a rebound in commodity prices in H2 2016, will continue in 2017.” www.live.anz.com (ATI).