Growth Targets at Around 6.5%

On March 5th, Prime Minister Keqiang Li announced in an address to Congress that China was aiming for growth of about 6.5% for 2017 and CPI of about 3%. He also mentioned the government would continue to implement a proactive fiscal policy and to maintain a prudent neutral monetary policy, in particular, M2 growth rate targeting at 12% y/y for 2017.

Price inflations slowed down in January-February. CPI experienced a large fall, dragged down by falling food prices, and rose 1.7% y/y, down 0.5 pps from last Q4. Ex-factory price index of industrial products rose 7.8% y/y, PPI rose 9.9% y/y, down 1 and 1.1 pps from last December, lowering for two consecutive months. We view the CPI decrease to be transitory but producer prices will continue to grow slower than before under tightening monetary policy.

In January-February, industrial output increased 6.3% y/y, up 0.2 pps from last Q4. Fixed asset investment excluding agriculture rose 8.9% y/y, up 1.1 pps from last Q4, largely from higher producer prices. Retail sales of consumer goods rose 9.5% y/y in nominal terms in January-February, down 0.9 pps from last quarter, and rose 8.1% y/y in real terms, down 1.1 pps and 1 pps respectively from last quarter. Imports in January-February rose 26.4% y/y, up starkly 23.7 pps from last Q4. Imports from developed countries also surged, possibly reflecting Chinese consumers’ higher quality demands. Exports were stabile as usual, growing at around 4% y/y.

In February, monetary policy continued its tightening. M1 rose 21.4% y/y, and grew around 20% y/y after canceling the Spring Festival effect, 1.4 pps lower than last December. M2 rose 11.1% y/y, down 0.2 pps from last December. Market interest rate increased. For example, the interbank deposits from AAA rated banks with maturity of one year had a return of 3.01% on November 1st, 2016, but rose to 4.18% in this March, up more 1 pps. The heightened market interest rate has negative effects on corporate financing. Net financing from corporate bond grew negatively for three consecutive months.

According to National Bureau of Statistics, real estate prices in China’s major cities rose around 50% y/y in the year of 2016. Property sales by area still rose 25.1% y/y in January-February. Local governments are now taking further steps to stabilize housing market by strengthening their cities’ housing purchase restrictions. We view there might be some corrections in China’s “first tier” large cities such as Beijing, Shanghai, and Shenzhen, but prices in second tier cities, mostly key provincial capitals, may remain to be sable, while small cities and towns in vast countryside (not those towns nearby large metropolitan areas) may continue to fall slightly in 2017. Our judgment is based on China’s sound GDP growth rate and top tier cities’ superior public goods provisions.