China’s real GDP expanded 6.4% YoY in Q1 2019, higher than the consensus forecast of 6.3%. Other data published today revealed higher industrial production in March, up 8.5% YoY (vs. 5.3% YoY in Jan-Feb), and much higher than consensus forecast of 5.9%. Retail sales growth was also stronger at 8.7% YoY in March (vs. 8.2% YoY in Jan-Feb), compared to consensus expectations of 8.4%.
China’s benchmark Shanghai Composite Index was up 0.3% on the day. China’s 10Y government bond yield rose to 3.43% today, compared to 3.40% at end-Tuesday. Hong Kong’s benchmark Hang Seng Index was down slightly by 0.02% today.
The better-than-expected Q1 GDP result was an indication that China’s growth is starting to stabilize, helped by government stimulus. We think that China’s growth has now bottomed out and could see further improvements from Q2 onwards. Government fiscal stimulus has been effective in underpinning growth and has included an expansion in infrastructure investment and the tax cuts on both individual and corporate fronts.
Indeed, on the back of the stimulus measures, we have seen some other “green shoots” in the Chinese economy recently.
Firstly, China’s manufacturing purchasing manager index (PMI) rose to 50.5 in March (compared to 49.2 in February), its highest level in six months. PMI production and new orders sub-components both improved in March, supported by domestic sectors especially infrastructure construction. While the new export orders sub-component stayed in contraction territory (i.e. below 50) at 47.1 in March, it improved compared to 45.2 in the previous month.
Secondly, China’s property market is showing a recovery. Property transaction volumes are rising. Home price momentum also picked up in March with nationwide housing prices up 0.6% MoM in March compared to 0.5% in the previous month, according to data from National Bureau of Statistics. In the 70-city home price index, home prices in 65 cities showed a rise in March, compared to 57 cities in February.
Thirdly, China’s credit growth started to accelerate in March. Total social financing rose to CNY2860bn in March, compared to the consensus forecast of only CNY1850bn for the month.
With the Chinese economy likely to continue to improve on the back of forceful fiscal stimulus, the People’s Bank of China (PBoC) might consider reducing the number of reserve requirement ratio (RRR) cuts later this year but we think it will maintain an easing bias. Apart from this, we think the US-China trade talks are in their final stages before an initial agreement. Any positive trade deal could be supportive of business sentiment in China.
We remain constructive on Chinese equities in the medium to longer term. However, due to the strong performance in Q1 and more recent weeks, we advise clients to consider tactically taking some profits and restructuring portfolio allocations. Near-term volatility could rise due to 1) the market refocusing on earnings downgrades given the still-challenging business environment, especially for the private sector, and 2) higher valuations for Chinese stocks, with their price to earnings (P/E) ratio rising to 13.4 (as of April 8), compared to a low of 10.3 at end 2018.
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