The Chinese economy has so far defied our expectations of a slowdown in 2018. GDP growth came in at 6.8% in the year to March, a rate of growth that is now unchanged since September last year.
The economy has been remarkably stable over the last year or so as policymakers have sought to engineer a soft landing. Retail sales were looking a bit soft in to the end of last year but rebounded strongly in the March quarter. The services side of the economy was also strong and the improved global growth environment was evident in the export data. Offsetting the positives, industrial production and investment spending both slowed over the quarter.
Overall this picture is consistent with the rebalancing in the economy policymakers are seeking. And despite the residual strength in the economy so far in 2018, we hold to the view of a modest slowdown to around 6.5% over the remainder of the year. Fiscal tightening and a slower property market are expected to lead the moderation of growth in 2018. The fiscal deficit target for this year has been reduced from 3.0% of GDP to 2.6%. However we expect capital expenditure will remain solid on the back of recent strong profit growth.
On the positive side, the service sector is expected to remain strong. Strength in this sector is contributing to a tightening in the labour market despite efforts to reduce over capacity in heavy industry. The strength of the labour market will lead to ongoing strength in the consumer sector. Furthermore, growth in the less capex-intensive service sector is also helping the economy reduce the overall economy's reliance on investment and debt.
As the economy cools fears of a hard landing will likely resurface. The most critical dynamic for the government right now is the ability of the service sector to absorb the excess labour from the rationalisation in heavy industry. They will be reluctant to see the economy slow to the extent that dynamic is threatened. If the economy starts to slow too fast we have no doubt the government will support growth if and when necessary.
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