China’s GDP grows 6.8% but the devil’s in the detail

As we expected, consumption was the main driver of China's economy in 1Q18, with fixed asset investment the supporting pillar, delivering a GDP growth rate of 6.8%. Nevertheless, we underestimated the purchasing power of consumers. Consumption growth contributed 77.8% of GDP growth in 1Q. Retail sales came in at 10.1%YoY in March and 9.8%YoY in 1Q18. Most of the growth came from daily consumption items, e.g. cosmetics, drugs, and clothing grew at 16.1%YoY, 10.4%, and 9.8% respectively in 1Q. Automobiles, though obviously not a daily consumption good, also grew strongly at 7.4%YoY in 1Q. The retail sales data paints a blooming consumption picture, which also implies that wage growth was decent (urban disposable income grew 8.8%YoY) and employment was steady (the Statistics Bureau announced its official unemployment rate at 5.1% in March, which is not particularly high). It also implies that the service sector is now more important than manufacturing for the economy.

Some industries did see a fall into negative growth in fixed asset investments, which was a surprise to us. For example, investment in rail transport fell 5.1%YoY in 1Q, and in the drugs industry, investment fell 12.5%. In other areas., however, such as computation and communication equipment, water management, rail\ship\spacetransport equipment, investment continued to grow as expected. The investment backdrop could have changed due to a decline in foreign inward investment in China during 1Q.

Among all investments, domestic corporate investments grew 8.4%YoY in 1Q but investments from offshore, including investments from Hong Kong, Macau and Taiwan, shrank in the same period. As trade tension between China and the US started in late March, we do not believe that the fall in investment from offshore entities was a result of recent trade tension.

Industrial production grew 6.0%YoY in March and 6.8%YoY in 1Q, which was lower than we expected.

But we still see strong growth in high-tech industries. Industrial robot production, for example, grew 29.6%YoY, and new energy automobiles grew 139.4%YoY in 1Q. This points to a trend that China has shifted from low-value-added production to high-tech products and parts production.

We believe that this trend will continue. That is, high-tech production will continue to make up the majority of growth in industrial production in China. Even if trade tensions escalate, we do not believe that this will change China's focus on high-tech production because local companies are already often the leading global companies in their area.

Trade is far more than the net sum of exports and imports. It affects production chains, employment, investment and prices and therefore profit margins.

If trade tensions between China and US escalate, both economies will face tougher business environments. It will be a lose-lose result for any parties involved in a material trade war.