Investment Institute
Market Alerts

China reaction: momentum accelerated boosted by investment

  • 16 April 2024 (3 min read)
KEY POINTS
China’s economy achieved solid growth in Q1 this year, rising by 5.3% yoy, largely exceeding the market expectation of 4.4%
The strong performance was a reflection of good policy implementation, supported by investment, especially State-Owned enterprises while private investment stayed sluggish
Momentum in retail sales slowed from the highs seen during the holiday season
We revise our GDP forecast for 2024 to 5.0%, now foreseeing the economy achieving the government growth target for the year
Yet the strength of policy support in the future could be reduced, particularly the likelihood of any policy rate cut, but we continue to expect a 50bps cut on RRR in the coming months

Much-needed solid GDP growth

China’s economy expanded by 5.3% yoy in Q1 2024, beating the market expectation by a large margin (BBG: 4.4%). The momentum in the economy accelerated from Q4 2023, which grew by 5.2%. In quarterly terms it rose by 1.6%. By industry, the secondary industry saw the fastest growth in value added in Q1, growing by 6.0% yoy, up from 5.5% in Q4 2023. While value added from the tertiary sector slowed to 5.0% in Q1 from 5.3% in Q4 last year.

The better-than-expected momentum in China’s economy is likely to change the market’s view which has been gloomy for several months. It also puts the economy in a better position to achieve the government growth target for the year of 5%. By value added, the secondary industry contributed the most, likely reflecting the higher investment and output from the manufacturing sector. However, the deceleration in the output from the tertiary sector highlighted ongoing weaker consumption in the economy.

Investment in the driver’s seat

Fixed asset investment (FAI) grew by 4.5% yoy in Q1, an increase of 4.8% in March, up from 4.2% in February. Investment in the manufacturing sector remained strong and grew by 9.9% in the first three months, equivalent to a rise of 10.3% in March, up from 9.4% in February. Investment in auto manufacturing was relatively modest at 7.4% yoy in the first quarter of the year. Infrastructure continued to be the hot destination for investment. In Q1, it grew by 9.9% yoy, implying an increase of 6.6% in March. By source of investment, public investment was up by 7.8% yoy in Q1 – echoing the strong boost to infrastructure - while private investment remained sluggish, up a mere 0.5% yoy. Although FAI from foreign funded enterprises improved, it was still 10.4% below the level in the first quarter of last year, improved from a decline of 14.1% seen at the end of February.

As Beijing’s fiscal stimulus package explained during the National People’s Congress in early March, the focus for the year will be to move up the value chain in the manufacturing sector and boost infrastructure projects. Indeed, the investment destination and funding source confirmed good implementation of such policy measures. However, private sector and foreign investor sentiment remain subdued. We expect public investment to continue leading among other investors this year, which should spillover into the broader economy.

Less exciting readings from retail

In March, retail sales grew by 3.1% yoy, slowed from a rise of 5.5% in February. Both sales in consumer goods and catering cooled somewhat – growing by 2.7% and 6.9%, respectively from 4.6% and 12.5% in February. Sales in services increased by 10% in Q1, down from the 12.3%. Household appliance sales stayed strong, growing by 5.8% in March, up from 5.7% in February. However, auto sales reversed to a decline of 3.7% in March, from a solid increase of 8.7% in February.

Annual figures this year were partly affected by base effects, with higher levels last year following the initial boost of consumption appetite following the lifting of lockdown measures. Nevertheless, early signs of a reduced propensity to save started to emerge with a decrease in M1 to M2 ratio in March. Moreover, consumption of big-ticket goods seemed to follow the direction of the policy measures – the rise in household appliances came after Beijing’s initiative of the home appliances trade-in and upgrade. Auto sales, which had a strong performance in the past two years benefitting from the trend of decarbonisation, now started running out of steam.

Good news from Q1 may lower the future expectation for policy support

The solid GDP growth in Q1 has eased gloomy sentiments in the market somewhat. However, it could also ease the pressure that government officials face and therefore slow policy momentum in the near term. Given the persistent drag from the property sector downturn and the dent in consumer confidence in the past years, this year’s growth needs to be backed by the supportive measures from Beijing. The better-than-expected reading in Q1 indeed is much needed for the country, but was mainly a reflection of supportive policies. While a good reading may curb the strength of future policy support and risk losing the good momentum that just gained.

On the back of the stronger Q1 GDP figure, we revised up our GDP forecast for the year to 5.0%, seeing the economy on track to achieving this year’s growth target. On the policy front, we expect the authorities stay supportive and continue maintaining an effective implementation of announced policy measures. In addition, we see a reduced possibility of policy rate cuts but maintain the likelihood of a 50bps cut in RRR for this year. 

Pushing the Walls
Macroeconomics

Pushing the Walls

Investment Institute
UK reaction: In the right direction
Macroeconomics Market Alerts

UK reaction: In the right direction

  • by Gabriella Dickens
  • 18 July 2024 (3 min read)
Investment Institute
UK reaction: Still at target, but services remains sticky.
Macroeconomics Market Alerts

UK reaction: Still at target, but services remains sticky.

  • by Gabriella Dickens
  • 17 July 2024 (3 min read)
Investment Institute

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    © AXA Investment Managers 2024. All rights reserved

    Back to top