Macro Monday:Takeaways from March economic data

China not labelled as currency manipulator: Last week MSCI China waslargely flattish. The onshore market was weighed on by regulatory risks whilethe offshore market by geopolitical risks. Last Friday, the US treasury saidthat China is not a currency manipulator, easing the likelihood of a trade war.

It is not that surprising though, as we discussed on Feb 27 (link) that out ofthe three criteria for a country to be labelled as a “currency manipulator”,China only meets one while countries like Germany, Japan and Korea meettwo of them. That said, the RMB has been very boring so far this year, rangeboundingbetween 6.8 and 6.9 (Fig 37). Actually it could appreciate moreagainst the US$ if it didn’t weaken against a basket of currency (Fig 40).

March data beat expectations: This Monday (April 17) China releasedMarch data. Overall, it is a set of strong readings. GDP growth in 1Q17accelerated to 6.9% (consensus: 6.8%) from 6.8% in 4Q16. More importantly,nominal GDP growth rose to 11.8% yoy, the fastest pace since 1Q12.

Industrial production in March also exceeded the consensus, rising to 7.6%yoy from 6.0% in Jan-Feb. Power consumption growth jumped to 7.9% yoy inMarch from 6.3% in Jan-Feb. Despite the strong data, the A-share still pulledback on Monday, as investors fear that good data could prompt policy makersto be more aggressive in tightening regulations. Earlier last week the CBRCjust said that it would carry out a special examination on regulatory arbitragetransactions, increasing the liquidity risk for the market.

Property sales started slowing while investment still strong: In March,property sales in floor space rose 15% yoy, down from 25% in Jan-Feb. It’sset to fall further in the coming months, given tighter purchase restrictions andmortgage availability. In 1Q17, mortgage as % of new loans dropped to 35%,down from 60% in 2H16. That said, the booming property market has loweredthe inventory for developers and also boosted their confidence. As the result,property investment growth rose to 9.4% yoy in March from 8.9% in Jan-Feb,while new starts rose 13.1% from 10.4%. For 2Q17, we expect propertyinvestment and new starts to slow, following the deceleration in sales.

Faster consumption growth driven by higher income: In 1Q17, China’sdisposable income per person increased by 8.5% yoy to RMB7,184. Itunderpins the strong retail sales growth in March, which accelerated to 10.9%yoy from 9.5% in Jan-Feb. Since CPI inflation is only 0.9% yoy in March, theacceleration in consumption growth should be mainly driven by real demand,mainly boosted by the hot property market and higher income.

Robust exports and soft inflation: Last week, China also released tradeand inflation data (our comments: Trade - Sino-US trade still a big concernand Inflation: The debate on stagflation and reflation should end). In short,exports in March were strong, indicating that the big miss in Feb was a blipand the global economy is indeed in better shape. However, it’s an issue that75% of China’s trade surplus in 1Q17 came from the Sino-US trade.

Meanwhile, inflation data point to extremely small pass-through from PPI toCPI. It also shows that the reflation cycle has already turned around. Lastweek we also published a thematic report on China’s capital outflows in 2016(What drove capital outflows in 2016?). Feedbacks suggest that the interestlevel for this topic is much lower than one year ago, when we published areport on the same topic (Dissecting China’s capital outflows in 2015).