Chinese GDP report card should be better than everybody expects

The 'two sessions' meetings held in early March this year set a fiscal stimulus package of CNY 4 trillion, of which around half was tax and fee cuts. The other half comes from local government infrastructure projects, including new metro lines and toll roads. Aside from the stimulus, some local governments have quietly relaxed housing regulations too. As a result, fixed asset investment should jump with fiscal money propping up infrastructure.

Investments in 1Q19 will mainly be supported by fiscal stimulus projects, including metro lines, toll roads and water management systems. But bear in mind that these are not market-driven investments instead, they're government efforts to cushion the economy from heading south too fast. Our forecast on fixed asset investments is 6.5%YoY year-to-date in March from 6.1% a month ago.

As the government continues to spend on new metro lines and toll roads, we expect the construction sector to add job vacancies to the market, which should hopefully keep the job market stable.

The gauge of job stability, in the absence of a good unemployment indicator, will be the growth of consumption and retail sales. We forecast retail sales to increase to 8.9%YoY in March from 8.2% in January-February. If the improvement in retail sales is like we forecast, it should reflect a healthy job market.

We expect industrial production to increase to 6.2% in March from 5.7% in January to February.

The headline figure is likely to look positive because of all the infrastructure projects but we'll need to see the details to evaluate if there is an export-related sectors’ production rebound. We're not optimistic as export-related manufacturers should not be willing to expand their production line when the trade talks between China and the US are still ongoing.

First quarter exports grew by 1.4% YoY while imports shrank by 4.8% YoY. Trade with the EU was 15.8% of total trade while trade with the US was 11.6%. But this is only goods trade.

Trade of services has been in deficit since Chinese tourists' outbound tourism activities keep rising. This may change in 2019 as Chinese consumers will be cautious about spending on big-ticket items.

For the first quarter of 2019, combining the two, the growth of net exports of goods and services should be near zero assuming tourism spending rises 5%YoY. We could be too optimistic about the Chinese spenders, but we all shall be revealed on Wednesday, 17 April.

Considering all of the above, we forecast GDP growth at 6.2%YoY in 1Q19, which will be lower than 6.4%YoY in 4Q18. But this is better than the government's lower bound target of 6.0%.

There is a real need to keep credit growth continuing to keep GDP growth above 6%. That's why we still expect a 0.5 percentage point RRR cut in April.

But we don't think there is a need for the government to increase fiscal stimulus as growth should continue to increase in 2019 when money is put into infrastructure production and so long as monetary easing continues.

USD/CNY in 1Q19 depreciated by 0.18% but the high-low volatility was still quite small at 1.8% and this tells us that the central bank has carefully managed exchange rate movements.

The central bank has to make the yuan flexible enough to follow the dollar index's movements, i.e. when the dollar rises, the yuan weakens. But it also had to cater to political needs by depreciating the yuan when there were trade talks to defy what President Trump said: "the yuan cannot depreciate if there is any trade deal"

Our forecasts for USD/CNY at 2Q19 and 3Q19 are 6.85, which may have to be revised as the central bank has managed the yuan in a very narrow range. But our year-end forecast at 6.75 seems to match what the central bank is doing. At least for now.