Chinese activity data today clearly confirms that the Chinese economy is recovering. This was signalled by the sharp rise in PMI for March and is now confirmed in investment and industrial production data. This is in line with our scenario for a gradual recovery this year driven by (a) a bottom in the construction sector, (b) a pick-up in infrastructure investment and (c) a moderate recovery in the export sector (see 'Presentation: Turn in Chinese construction set to be a game changer' , 5 April 2016 for our case for stronger construction growth).
GDP growth in Q1 was in line with expectations, rising 6.7% y/y versus 6.8% y/y in Q4. It is the lowest level in six years but in line with the government's growth target of 6.5-7% for 2016. In nominal terms, GDP growth actually picked up in Q1 from 6.0% to 7.1% as the GDP deflator turned positive jumping from -0.8% y/y to 0.4% y/y.
However, when gauging the strength of the Chinese economy, we do not rely too much on the GDP data, as there some doubts over the reliability of the numbers. Instead, we look at a combination of data for PMI, industrial production, raw materials prices etc. to piece together a picture of the Chinese economy. In addition, we put more emphasis on construction and industry as these sectors matter the most for the rest of the world. China's soft landing has been due to a robust growth in the service sector but this been less of a benefit to the rest of the world. In the industrial and construction sectors we believe we have had what can be characterised as a hard landing, and this has had a severe impact on the rest of the world.
However, when looking at data for housing starts, industrial production and PMI, a clear picture of recovery emerges. Hence, we continue to believe the worst is behind us and we believe growth in these sectors bottomed in Q1 and is likely to recover in the course of 2016.
Today's data for industrial production showed a rise of 0.6% m/m in March, which was the strongest increase since December 2014. This fits well with PMI manufacturing data for March from both Caixin and NBS, which both showed a robust increase in the same month.
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