The Chinese economy had a strong start to 2017 as activity data released by the National Bureau of Statistics (NBS) on Tuesday showed better-than-expected growth in fixed-asset investment and industrial output. But retail sales rose at the weakest pace in 11 years, dragged down by a decline in vehicle sales after tax breaks were scaled back.
Urban fixed-asset investment climbed 8.9% in the first two months of 2017 from the same period last year, the fastest growth since the January-through-June period last year and exceeding the median estimate for an 8.4% gain in a Caixin survey of 10 economists. The increase was driven by a recovery in private investment to 6.7% from 3.2% for the whole of 2016, a 27.3% surge in infrastructure spending, and an 8.9% jump in real-estate investment, the biggest increase in two years, the data showed.
Industrial production grew 6.3% year-on-year in the January-February period, the biggest increase since March 2016 and higher than the 6.2% estimate in the Caixin survey.
Retail sales, which includes purchases by both individual consumers and the government, rose by 9.5% year-on-year, missing the median projection for a 10.5% gain in Caixin’s survey. It was the slowest growth since February 2006 and also the first time the figure had fallen into single digits since that month.
NBS spokesman Sheng Laiyun said market confidence is improving as reflected by rebounding investment growth, particularly by private companies, due to a recovery in business conditions in the industrial sector.
“The real economy has been improving while structural reforms advanced steadily,” he said at a news conference in Beijing. “Therefore, overall market confidence has continued to strengthen.”
China releases combined fixed-asset investment, industrial output and retail sales figures for the first two months of each year instead of separate monthly data to minimize distortions caused by the timing of the Spring Festival holiday, which falls on a different week each year.
“Providing a fillip to global sentiment, China’s economic growth picked up in the first two months, reflecting stronger investment and exports as well as restocking in industry, even as consumption growth eased,” Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong, wrote in a research note.
Kuijs said that following the “solid data” at the start of the year and the slightly more “dovish stance” than expected signaled by the government at the National People’s Congress (NPC), he has raised his projection for gross domestic product (GDP) growth this year to 6.5% from 6.3%.
In his work report to the NPC in Beijing on March 5, Premier Li Keqiang set a GDP growth target for 2017 of “around 6.5%, or higher if possible in practice.”
China’s economy continues to be driven by investment, especially infrastructure spending backed by the government and investment by state-owned enterprises. The 27.3% increase in infrastructure investment compared with growth of 17.4% for the whole of 2016, while state companies’ investment rose by 14.4% year-on-year in the January-February period. Investment in manufacturing continued to be lackluster, up just 4.3% year-on-year.
The breakdown of industrial output data showed thermal power generation rose by 7% year-on-year in the first two months of the year, compared with a decline of 4.3% in the same period last year and an increase of 7% year-on-year in December, suggesting that the heavy-industry sector is picking up on the back of improving demand.
Analysts attributed the deceleration in retail sales growth mainly to a drop in car sales due to the expiration of tax breaks on the purchase of small-engine cars at the end of 2016, which led to a surge in sales in the fourth quarter. Although the government renewed the program on Jan. 1, the tax incentives were reduced.
The NBS data showed total vehicle sales fell by 1% in the January-February period, down from a 5.4% increase in the first two months of 2016.
“If you exclude cars, then consumption of other goods remained resilient,” Rong Jing, an economist with BNP Paribus in Beijing, told Caixin. Service-related consumption such as spending on tourism and entertainment, which are not included in retail sales figures, has been “extremely stable and healthy,” she added.
Real estate activity was strong, with investment in the January-February period rising by 8.9% year-on-year, accelerating from a 6.9% pace for the full year of 2016. Residential housing sales measured by floor space sold jumped by 23.7%, picking up from an increase of 22.4% in full year 2016. Purchases accelerated in central and western regions even as the pace of growth cooled in the east, where many cities have imposed controls on home buying to rein in surging prices.
Sheng said the strong performance of the property sector showed that the government’s strategy of imposing differentiated policies to deal with localized conditions was effective.
“It maintained stable development in the property market and avoided affecting the progress of the reduction of stocks of unsold housing,” he said.
But Brian Jackson, an economist with research firm IHS Markit, said that real estate “remains a persistent concern” for growth prospects this year.
“While it is encouraging to imagine a smooth deflation of the 2016 bubble, prior experience in China indicates that a correction may still be on the cards, if somewhat behind schedule,” he said in a note.
The government has vowed to maintain controls on the real-estate market this year to rein in price increases. In addition to curbs on purchases, funding for property developers has been squeezed as they have been banned from raising money through bond issues, and banks have been told not to issue new loans to the industry.
More areas, including the southwestern municipality of Chongqing and the southern island province of Hainan, have recently started to impose controls on home purchases, and banks have tightened mortgage lending.
Rong from BNP Paribas said that although GDP growth may hold up in the first half of 2017, “the uncertainty lies in the property sector” and whether the government’s restrictions will cool the market to such an extent that its support for economic growth declines sharply from that in 2016. The country will still have to rely on infrastructure investment to drive expansion this year, she said.