Author: David Chao (Global Market Strategist, Asia Pacific)
China’s economy has started to show signs of stabilization and even positive momentum in the first quarter of 2019 as the government’s expansionary fiscal and monetary measures start to kick in. More importantly, the economy is no longer hampered by last year’s US trade war fears and the central government’s deleveraging campaign.
Chinese Premier Li Keqiang spoke recently at the Boao forum and remarked that the first quarter’s economic performance had exceeded the government’s expectations. Given the recent positive economic data for the first quarter, I am optimistic that the Chinese economy will gain steam into the rest of the year.
First quarter GDP is expected to be released next week and there is potential upside to the government’s first quarter and full year guidance. The most recent industrial production / PMI for March unexpectedly climbed to 50.5, while the past three months have been below 50. A reading above 50 signals that manufacturing activity is in expansionary territory. The rise was driven by stronger production and new export orders.
The relaxation of the anti-pollution campaign and lunar new year holiday could also be partially factored in to the rise. Although I continue to see weakness in new home sales and passenger cars, manufacturing activity has likely reached a bottoming out and we can expect positive growth in the second quarter.
Although one set of positive economic data does not guarantee a recovery, the government’s expansionary fiscal policies such as the 2 trillion RMB tax cut as well as perceptions of a near-term resolution of the trade war should support this positive trend into the second quarter, translating into stronger corporate earnings and GDP for the rest of the year.