China Surprise

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By Michael Knox

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Chief Economist and Director of Strategy

Date posted:

29 May 2017, 11:23 AM

Purchasing Managers Index (PMI)

The two most visible indicators of the Chinese economy are the official, Non-manufacturing PMI and the official Manufacturing PMI. A look at the Non-manufacturing PMI tells us that something new has been happening in the Chinese economy.

The Chinese Non-manufacturing PMI reached its low back in March last year. For the month of March 2016 the Non-manufacturing PMI stood at 53.1. Then it started to recover. By July it had reached 53.9. It stabilized, then rose again in the second half of the year to reach 54.7 in November 2016. It stabilized for another few months up until February, then in March it took off, reaching 55.1. It has since eased to 54.0 in April.

This Non-manufacturing PMI appears to show that the Chinese economy kicked twice in the last year. The first time was in the second quarter of 2016, the second time was in the final quarter of 2016. Right now, as we enter the second quarter of 2017 the Chinese economy may have found its high.

The Chinese Manufacturing PMI shows a similar rise but the timing is different. The Chinese Manufacturing PMI reached its low in July last year. For the month of July, the Manufacturing PMI stood at 49. Then it started to recover and by November it had reached 51.7 where it stabilized. There was a slight decline to 51.3 in January; the index then rose again to a new high of 51.8 in March. It has since eased to 51.2 in April.

We can see from both the Non-manufacturing PMI and the Manufacturing PMI that the Chinese economy was significantly stronger in early 2017 than it was in early 2016. The peak growth rate in year-on-year terms has likely to have been reached in the first quarter of 2017.

Chinese GDP

With such a recovery in the Non-manufacturing and the Manufacturing PMI we probably should not have been surprised that GDP was stronger. GDP for the year to March grew at 6.9%. This was 0.2% higher than the market expectation of 6.7%. Growth was really driven by the growth of Tertiary Industry (the services sector, remember the strong Non-manufacturing PMI) which grew by 7.7% for the year to March.

Secondary Industry (the manufacturing sector) was also fairly strong. Secondary Industry grew by 6.4% for the year to March. Primary Industry (the agricultural sector) grew at a more modest 3.0%.

It is interesting to look at where the high growth sub-sectors were. In the services sector, the fastest growing large sub-sector was real estate which grew by 7.8% for the year to March.

The two most rapidly growing sectors in Tertiary Industry were Information Technology and Business services. Information transmission (telecommunications), Software and Information Technology services, were the fastest growing sub-sectors of tertiary industry growing at 19.1% for the year to March. Still this sub-sector is relatively small within Tertiary Industry. The second most rapidly growing small sub-sector in Tertiary Industry is really concerned with services to real estate. This sector is renting and leasing activities and business services. This sector grew at 10.2% for the year to March.

Quarterly Growth

The two surprisingly strong growth quarters in the past year were the second quarter of 2016 and the fourth quarter of 2016. It is these two quarters that generate most of the out-performance. In the second quarter of 2016 the Chinese economy grew by 1.9%. This was stronger than the performance in the same quarter of 2015 of 1.7%. In the fourth quarter of 2016 the Chinese economy grew by 1.7%. This was stronger than the performance in the same quarter of 2015 of 1.5%.

Year on year growth started in 2016 by rising at 6.7% for the year to March 2016. It was then expected to continue to decline. It did not do this. It first stabilized and then accelerated. The year on year growth rate remained 6.7% for the year to the second quarter. It then remained at 6.7% for the year to the third quarter. It then accelerated to 6.8% for the year to the fourth quarter of 2016, and it accelerated again to 6.9% for the year to the March quarter of 2017.

Real Estate

The activity in Real Estate was remarkable. Investment in residential buildings in the March quarter was 11.2% higher than the year before. The floor space of commercial buildings sold went up by 19.5% for the year to March.

Living Standards

The Chinese CPI went up by 1.4% for the year to March. Prices rose by 1.5% in urban areas and 1.1% in rural areas. Compared to this low and stable level of inflation the growth in disposable income was much stronger. National per capita disposable income rose by 8.5% for the year to March. This was 7.0% faster than inflation. This growth in income is in the cities. The per capital income of urban residents was 2.6 times that of rural residents.

Supply side reforms

The Chinese economy is cutting over capacity. The output of coal decreased by 0.3% for the year to March. China is attempting to optimize its economic structure. The value added by the Tertiary Industry accounted for 56.5% of GDP in the first quarter. This was 17.8% higher than that of Secondary Industry or Manufacturing. In the first quarter, final consumption expenditure was 77.2% of GDP. China is now focusing on domestic demand rather than export demand. What China calls Strategic and Emerging Industries (IT, High-end Manufacturing, Biotechnology) grew by 10.3% year on year. In the first quarter, energy consumption per unit of GDP dropped by 3.8% over the previous year.

Conclusion

Chinese growth has picked up because of growth in the services sector. The economy is stronger in China, even through energy consumption per unit of GDP is falling. Chinese growth is increasingly being driven by domestic demand rather than export demand.

After growing by 6.9% for the year to March 2017, we think that China will grow by 6.7% for the year to December 2017. It should then grow by 6.4% for the year to December 2018. The Chinese economy should remain strong.

More information

View more analysis by Michael Knox by clicking on 'economic strategy' in the popular topics list to the right of this page.

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