Cautious optimism on China economy as private investment drags

HONG KONG - Whlle China's Q1 GDP allows for cautious optimism for the Chinese economy, it does not signal a full-fledged recovery given slower growth in private investment. But one certainty is that, as the Chinese economy starts to stabilise, the incentive for the People's Bank of China to conduct further stimulus may not be as strong as before, says Natixis in a research note.

Breaking the GDP growth data into expenditures shows that retail sales were a major component, increasing 8.3% on-year in Q1 2019 compared with 8.2% in the December quarter.

"In particular, car sales were still decelerating, but the pace of the slowdown has been less aggressive, contracting by -4.4% year-on-year compared with -10% of November 2018," the note says.

Fixed asset investment, the key signal for cyclical recovery, also stabilised, growing 6.3% in March on-year versus 5.9% in March 2018.

Growth was mainly supported by infrastructure and property investment, which accelerated to 4.4% and 11.8% respectively in March. "This is not surprising given the government's fiscal and monetary stimuli which have been carried out since last year," Natixis notes.

"That said, the private manufacturing investment remains lacklustre as total private investment growth slowed to 6.4% despite acceleration in the property market.

"As such, while the growth data looks good, it is still hard to argue that China is back on a sustainable recovery trajectory, as the private corporates still have concerns over investment in the real economy.

"In addition, imports contracted 7.6% in March, signalling weaker domestic demand for foreign goods. More data is needed to justify a full-fledged recovery."

www.natixis.com (ATI).