Financial Services Focus Group Quarterly Update – Q4 2018

Published on 2019-01-23

China Economic Update for the 4th quarter of 2018 - by Standard Chartered Bank China

Better December growth despite a slower Q4

  • China posted GDP growth of 6.6% in 2018 (6.8% in 2017); Q4 growth moderated to 6.4% y/y
  • However, retail sales and industrial production growth beat market expectations in December
  • We maintain our 2019 growth forecast for China at 6.4%, above market consensus of 6.2%

China’s GDP growth moderated to 6.4% y/y in Q4-2018 from 6.5% in Q3 and 6.8% in H1 (Figure 1), in line with market expectations, while full-year 2018 growth was 6.6%, versus 6.8% in 2017. Consumption remained the dominant growth driver, contributing 76.2% of 2018 GDP growth, 18.6ppt higher than in 2017.

On a monthly basis, December growth beat expectations likely partly on seasonal issues, as growth typically picks up at quarter-end. The economy is going through a soft phase, with continued headwinds from slowing growth in credit, industrial profit and housing sales. Export growth is likely to moderate in 2019 due to weaker external demand. On the positive side, market confidence appears to be stabilising on the government’s reassurance to increase policy stimulus in 2019; improving prospects of easing US-China trade tensions; and a stronger Chinese yuan (CNY). Market-based reforms are probably needed to improve the long-term growth outlook.

With increased policy stimulus, we expect growth in China to bottom out in Q1-2019 at 6.3%, followed by a mild cyclical recovery in H2. We forecast GDP growth of 6.4% in 2019, above market consensus of 6.2%. Fiscal stimulus through lower taxes (see China – Quantifying the next VAT cut) and higher budget deficits are expected to play a major role in 2019. The People’s Bank of China (PBoC) is likely to keep an accommodative monetary policy to ensure liquidity for increased bond issuance. We forecast a total 300bps cut in the reserve requirement ratio (RRR) in 2019 (see China – 2019 focus on ‘keeping reasonable growth’).

SCB - Q4.jpg 

In this update you will also find:

  • IP growth improved to 5.7% y/y in December, but headwinds remained
  • Urban household consumption growth picked up to 5.2% y/y in Q4
  • Falling industrial profits cloud the manufacturing FAI outlook
  • The housing market remains soft though further sharp declines are unlikely
  • We lowered our CPI forecast for 2019 to 2.0%
  • Export growth is expected to slow in 2019 due to softer external demand
  • Slowing credit growth remains a key obstacle to economic growth

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