Following a period of stabilization, in 2017, the Chinese1 economy saw its first acceleration in annual GDP growth (+6.9% YoY, up 0.2 ppt from 2016) since 2010. As in the previous year, the tertiary sector (+8.0%, +0.2 ppt) led growth, followed by the secondary (+6.1%, unch) and primary industries (+3.9%, +0.6 ppt). As shown in the line chart below, quarterly GDP growth quickened to +6.9% YoY at the beginning of 2017 before dropping a notch again in Q3 as fixed asset investment slipped on the back of housing and liquidity tightening as well as tougher environmental regulations, steadily remaining at +6.8% ever since.
Average GDP growth
While infrastructure and property investment were the key drivers of the stabilization in 2016, rebounding manufacturing investment, considerably improved external demand and reviving domestic consumption point to a more broad-based recovery in 2017. That said, internal demand now has a stronger positive impact on growth than exports, which looks like a more sustained development as China’s growing middle class continues to provide a strong tailwind to domestic consumption.
Entering 2018, in Q1, growth steadiness was significantly supported by consumption (online retail sales and delivery services, for instance, each growing by over 30%) and manufacturing, specifically in the high-tech “strategic” emerging industries (+9.6%). The target growth rate (~6.5%) still looks easily within reach.
All in all, the economy remains vibrant with solid growth momentum. The desired rebalancing from stimulus and exports towards a more services, consumer demand and innovation-driven economy under the so called “New Normal” of slower but “higher quality” growth is increasingly underpinning GDP expansion.
Nevertheless, supply-side structural reforms as well as regulatory tightening to mitigate environmental and financial risks. And while deleveraging measures may lead to a stabilization of China’s debt pile this year, it remains considerable. External uncertainty risks including trade frictions with the U.S. persist and real estate activity continues to show significant variations nationwide, although property market prudential measures have so far tamed volatility.
National People’s Congress
The National People’s Congress (NPC) begins every year with the presentation of the Government Work Report by the Premier. This year, Premier Li Keqiang emphasized the three tough battles of 2018 (risks, poverty and pollution) and presented the objectives for the year to come. The growth target was set to around +6.5% YoY (compared to previous years when it was “6.5% or better if possible”) and the budgetary deficit is set to be reduced to 2.6% of GDP (compared to 3% previously). Moreover, Premier Li announced VAT cuts of RMB 800 billion in order to boost the competitiveness of the Chinese private sector.
In addition to various numerical targets, the NPC unveiled appointments of senior officials such as Yi Gang as People’s Bank of China (PBoC) Governor and Liu He as Vice-Premier as well as an impressive restructuration plan. This plan includes the merger of the China Banking Regulatory Commission (CBRC) with the China Insurance Regulatory Commission (CIRC) and a reorganization of authorities supervising the financial sector. The Financial Stability and Development Commission (FSDC), created in the summer of 2017, will play the coordinating role and oversee PBoC, which will take care of macro-prudential supervision and the draft of regulations while the regulatory commissions will be tasked with execution.
The wide restructuration saw the dissolution and creation of various ministries such as the Ministry of Agriculture, which became the Ministry of Agriculture and Rural Affairs. The National Development and Reform Commission (NDRC) lost many of its functions to other ministries. Restructuration aside, a number of new administrations and agencies are being set up including the State Administration for Market Regulation (SAMR). The SAMR will take over the duties of the State