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China's economy appears to have jumped out of the blocks in 2018 with industrial production rebounding after the easing of pollution controls imposed over the winter "heating season".
Key points:
- Monthly data points to a rebound in China's economy after winter pollution controls were relaxed
- Property development continues to drive domestic economy
- Renewed air pollution concerns may see further cuts in steel & coal production
Industrial production rose by 7.2 per cent in the first two months of the year, compared with forecasts closer to 6 per cent, while infrastructure spending also beat market expectations.
Retail sales, while less positive and boosted by an increase in car sales, were still solid.
Capital Economics' Julian Evans-Pritchard said while he remained cautious given the data had similar flaws to Chinese GDP calculations, the overall picture was an upbeat economy enjoying a strong start to the year.
However, Mr Evans-Pritchard warned a rebound in activity early this year always seemed likely as the anti-pollution campaign faded.
"As the one-off boost to output from paring back pollution controls fades, we expect growth to start slowing again in the coming months," he said.
The big steel mills were ordered to cut production by up to half ahead of winter, when coal-based pollution commonly soars by 30 per cent as domestic heating is turned up.
Property investment still strong
Mr Evans-Pritchard said robust foreign demand remains a key prop to activity with industrial sales volumes for exports picking up.
The domestic drivers such as electricity, cement, steel, glass and mobile phones all recorded higher output as well.
Infrastructure spending — as measured by fixed asset investment — also helped buoy domestic activity.
Property investment growth jumped from 7 per cent at the end of last year to almost 10 per cent over January and February.
The National Bureau of Statistics published combined activity for the first two months of the year to smooth over distortions caused by the Lunar New Year holiday.
"But with the current strength of property investment clearly unsustainable and the headwinds from slowing credit growth and tighter fiscal policy still building, we expect this latest improvement in the activity data to prove short-lived," Mr Evans-Pritchard said.
Air pollution lingers
While the disruptions caused by the pollution crackdown appear to be easing, a deterioration in air quality remains a concern for authorities.
A study of air quality published by UBS found in the last two weeks of February, more than half of China's key provinces registered worse Air Quality Index (AQI) readings than in 2017, even though the comparison should have benefited from less industrial activity with Chinese New Year being later this year.
UBS said the finding continues a trend of worse air quality seen since mid-December.
"We note 70 per cent of provinces have an AQI of greater than 100 which is 'Unhealthy for Sensitive Groups' — [and] in our opinion, Chinese authorities are likely to see this as unacceptable medium longer-term," UBS analyst Myles Allsop said.
Mr Allsop said authorities are likely to take further action to reduce pollution over the next six months, including setting a new three-year production target for the key regions.
At the recent National People's Congress (NPC), Premier Li Keqiang announced "supply-side reforms" which would roughly halve steel and aluminium capacity from 2016 levels.
| Industry production | Target 2016 | Result 2016 | Target 2017 | Result 2017 | Target 2018 | Target 2016-18 |
|---|---|---|---|---|---|---|
| Steel (million tonne) | 45 | 65 | 50 | 50 | 30 | 145 |
| Coal (million tonne) | 250 | 290 | 150 | 150 | 150 | 590 |
Source: UBS
"We believe China is firmly committed to reduce pollution further medium-term and this will continue to have a material impact on commodities, steepening cost curves as well driving further closures and growth in 'green' commodities," Mr Allsop wrote in a research note.
"In our opinion, Premier Li's opening speech supports our view that supply reform and pollution reduction measures remain a priority."
NAB's Gerard Burg said commentary at the recent NPC indicated authorities expected a period of economic stability ahead.
"The growth target was unchanged at 6.5 per cent and growth in money supply and credit are tipped to be around the same as last year," Mr Burg said.
"The only significant shift is a smaller fiscal deficit target, at 2.6 per cent of GDP — down from 3.0 per cent last year —which may point to softer GDP growth in 2018."
Topics: economic-trends, business-economics-and-finance, china