After a rebound in 2017, we expect China’s growth to hold up well in 2018. We see real GDP growth at 6.7% (vs. consensus at 6.5%) and nominal GDP growth above 10%. We focus on five themes:
1.Manufacturing upgrading. Manufacturing investment has recovered from a five-year decline and grew 4% in 2017. We saw a bigger outperformance by the “new economy” sectors that include machinery, electronics and information communication equipment. They grew a combined 8% in 2017, more than offsetting the contraction (-0.4%) in the “old” sectors such as steel, non-ferrous metal, plastics and chemicals. Leading the recovery are China’s private sector businesses, which have gone through a process of creative destruction to move up the value chain. They have repaired their balance sheets and are now investing again. Helped by domestic upgrading and a continued global recovery, we expect manufacturing investment to grow 6% in 2018, from 4% in 2017.
2.Export recovery to continue. China’s exports rebounded from a contraction of 7.7% in 2016, to grow 7.4% in 2017. We expect the export recovery to continue in 2018, supported by moderate growth in China’s overseas market. Similar to the domestic picture, we expect export growth to be led by the electronics and machinery sectors.
3. Housing market to slow. After defying the sceptics with a steady performance in 2017, we expect the housing market to slow in 2018. Leading indicators such as sales growth has started to slow in a more broad-based manner. Housing starts growth has also weakened. We expect housing investment to slow to 4.5% y-o-y in 2018, from 7.7% in 2017. Steadier sales growth in Tier 3 and Tier 4 markets, lower inventory and faster supply growth should reduce the risks of a bigger slowdown.
4.Neutral monetary policy. Despite robust growth, inflation has been soft in 2017. Normalising food prices may put some upward pressure on headline CPI inflation in 2018. But core inflationary pressures should be moderate, giving the PBoC plenty of policy space. The risk is for a more hawkish tone at the National People’s Congress in March.
5.Better mix of an expansionary fiscal policy. Infrastructure investment growth may slow modestly in the near term given tighter public private partnership regulations, but the full year 2018 impact will be limited. In addition, we expect more to be done to reduce the corporate sector’s tax burden and incentivise innovation.