China's Q1 GDP growth beat expectations

China’s National Bureau of Statistics (NBS) reported Q1 GDP data that handily beat expectations and sets the economy on a good starting track to meet the 5% target for the year. According to official GDP data, headline growth edged up to 5.3% y/y in Q1, beating consensus expectations of 5.0% y/y and up from 5.2% in the prior quarter.

The more robust overall growth number suggests that the economy is on firmer footing with a solid industrial sector and improving household sentiment.

GDP growth showed sequential momentum in Q1 - though the latest March monthly economic data shows that the recovery remains fragile and more policy support may be needed. We believe policymakers are mindful of these challenges. The NBS quoted a complex external environment and rising uncertainty as key to watch this year..

The GDP beat came primarily from strong fiscal stimulus to the infrastructure sector in the past couple of quarters. Fixed asset investment growth accelerated to 4.5% YTD y/y in March from 4.2% in the prior two months.

On the flipside, factors weighing on the economy continues to come from the property market –the latest home sales data shows a continued soft patch in March. More policies could be rolled out shortly to remove certain property purchase restrictions or provide additional liquidity to real estate developers. These measures could arrest the slowdown later on this year.         

From the production side of the economy, industrial production (IP) grew 4.5% y/y,. There could be a bit of seasonality in the March IP data, which slows that output remained stagnant on a sequential basis, in contrast to the strong exports data. In terms of volume, Chinese exports hit a record high last month. Overall, growth appears to be reaccelerating around the world, and Chinese manufacturing and exports are likely to be aided by the improving global macro demand environment. Chinese corporates have also been investing in their infrastructure and equipment and are likely to take advantage of the upturn in the global economic cycle.

Consumption patterns in China also remain tepid, as March retail sales came in at 3.1% y/y, below expectations and slower than the 5.5% y/y in the prior month. On a seasonally adjusted sequential basis, retail sales showed little growth.

These data points suggest that China’s economy is on track to meet the government’s official 5% GDP growth target for the year. The underlying propellers for GDP growth in China, though showing signs of recovery, remain fragile and more policies are likely to be rolled out in order to improve household and private enterprise sentiment. Still, policymakers have maintained that fiscal prudence is important and any stimulus measures we get would likely be more targeted and have multiplier effects. Chinese leaders are confident that improving growth prospects will revive sentiment, and they have many policy tools at their disposal.