China’s economic growth in March still ran stable. PPI inflation could fall fromthe peak in Feb, while CPI inflation could stay low at 1.0% yoy. 1Q17GDPgrowth, to be released on 17April, could stay flat at 6.8% yoy, while nominalGDP growth could rise to around 11%, the strongest pace in the past fiveyears. That said, we also expect 1Q17to mark the peak of the ongoingcyclical recovery.
Robust growth in March: NBS manufacturing PMI, to be released on 31March, could rise to 51.8, which would be a new high since April 2012. In thepast, NBS PMI has never dropped in March. Meanwhile, industrial productiongrowth could edge down to 6.2% yoy (prev: 6.3%) due to base effect.Meanwhile, Fixed Asset Investment (FAI) growth could also moderate, as thegovernment needs to save some dry powder for the future. Retail salesgrowth could decelerate to 9.3% yoy, as auto sales could decline again inMarch.
Muted CPI inflation pressure: CPI inflation surprised on the downside thisFeb, coming in at 0.8% vs the consensus figure of 1.8%. Food and vegetableprices continue to fall in March. Therefore, we expect CPI inflation in March tostay low at 1.0% yoy, implying extremely limited pass-through from PPI toCPI. PPI may already have peaked in Feb at 7.8%, and we expect it tomoderate to 7.5% yoy in March. Entering 2Q17, a much higher base will kickin, which will drag down PPI inflation further (chart, top left). The soft CPIinflation data suggest that the real economy is far from over-heated. As such,we believe PBoC will keep the benchmark 1-year deposit rate on hold.However, it could keep raising the interbank rates to deflate the financialbubble, and also to keep pace with the hiking cycle by the Fed.
Better exports and FX reserves data: Export growth could rebound to 3.0%yoy in March. Given the higher global economic growth and inflation, weexpect China’s exports to grow 3% in 2017after falling 8% last year.Meanwhile, import growth could decelerate from 38% in Feb to 18%, largelydue to the fading CNY effect and a higher base for commodity prices. InMarch, FX reserves could rise by another US$10bn to US$3.015tn, thanks tothe weak US$ and the existing capital controls. In our 2017outlook, we drewan analogy between capital controls and supply-side reforms: Both are nonmarketmechanisms and unpopular for sure, but they work, effective enoughto change the supply and demand in the market.
Growth drivers about to losing steam soon: From a longer perspective, thekey question is how long the current up-cycle could run. One year ago, wepredicted a new earnings cycle ahead, but in that note we also made clearthat the recovery was a purely cyclical one, driven by reflation, restocking andreal estate. For the three growth drivers, reflation is close to a turning point asM1growth, which tends to lead PPI inflation by around six months, peaked inlast July. For restocking, the current inventory level is already quite high. Ifcommodity prices stop rising, the incentive to add more inventory will be gone.For the real estate sector, the gap between high- and low-tier cities continuedto widen in March. But low-tier cities are not very likely to decouple with thenational property down-cycle, not to mention that more and more cities areramping up property curbs in the past few weeks.
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