Chinese real gross domestic product (GDP) rose by 6.8% (year-on-year) in the fourth quarter, in line with consensus expectations. On a quarter-over-quarter basis, growth slowed to a 1.6% (6.6% annualized) pace, but the deceleration was widely expected. Growth in the second and third quarters was revised up a touch, boosting annual growth by about 0.1 of a percentage point. Overall, the Chinese economy expanded at a 6.9% pace last year, a bit firmer than the 6.7% pace recorded in 2016.
Nominal GDP grew 11.0% (y/y) in the fourth quarter, slightly weaker than in the previous quarter. In 2017, nominal GDP rose by 11.2%, with the gap between real and nominal GDP largely explained by a 6.4% rise in producer prices. It’s worth noting that 2017 saw the first increase in producer prices since 2011.
Growth in economic activity was broad-based on an industry basis. Primary industry firmed up, increasing 4.5% y/y in the fourth quarter, while secondary (construction and manufacturing) activity decelerated to its slowest pace of the year at 5.5%. On a positive note, growth in tertiary (services) industries accelerated to 8.2% y/y, marking its best rate of advance during 2017. Service industries comprise the bulk of economic activity in China, and contributed just over half of the GDP growth in last year.
Fixed asset investment (excluding rural areas) remained at a sub-8.0% pace in the fourth quarter (reported on a year-over-year, year-to-date basis). Fixed asset investment has been slowing consistently since early-2013 when it was rising by around 20% per year, reflecting the shift away from investment toward services. Moreover, at 7.2% in 2017, fixed asset investment increased at the slowest rate on record.
Key Implications
The Chinese economy recorded a healthy advance in 2017 despite a slowdown in credit-fueled construction. Overall, growth beat the target of “about 6.5%” announced early in 2017 by Chinese authorities.
Efforts by Chinese authorities to slow credit growth in order to manage financial stability risks, seem to have borne some fruit. Credit growth slowed in 2017, helping China’s debt-to-GDP ratio level off. Moreover, firming growth in the services sector is an encouraging sign that the process of the rotation away from a dependency on debt-financed investment is well underway. But, there’s still much work still to be done, with restructuring industries saddled with overcapacity and resolving bad debts being top of mind. As such, we anticipate policymakers will continue to maintain a tightening bias in domestic credit conditions this year.
We anticipate that the Chinese economy will grow at a 6.5% pace this year. Although strong global demand should help support Chinese exports, policies aimed at improving air quality and environmental conditions, together with tighter credit conditions and the closure of inefficient firms, are likely to exert some drag on the output of primary and secondary industries (e.g. mining, manufacturing, and construction). Nevertheless, growth of 6.5% is still above the trend-pace of growth in China, estimated to be between 5.75% and 6.25%
