In 2017, China proved its ability to grow at a brisk pace despite its large size, finishing the year strong with real GDP likely to be up 6.8% YOY. Whether this trend can continue was the subject of much debate during our Investment Quarterly meeting conducted last month. While we recognize that there are some headwinds ahead, we came out on the more optimistic side for China to be able to maintain 6.5%+ growth in 2018, supported by underappreciated household consumption and ongoing industrial upgrading.
China is often said to be largely driven by investment and it has been true. IMF estimated the share of GDP from investment at 48% in 2011, although it has since been tracking lower. If we measure in a different manner and look in terms of contribution to GDP growth, the commanding share actually does not come from investment anymore, but rather it is from consumption as the chart below illustrates.
In 2018, we expect the momentum in consumption can be maintained to possibly tick higher. A few data points to confirm our view include:
In terms of the boost from industrial upgrading, we see a majority of the companies planning to increase capital expenditure in 2018, especially in regards to research and development in technology investment. From a more structural sense, we also want to note the aggressive National Development and Reform Commission’s (NDRC) 3 year action plan to integrate automation, artificial intelligence, and big data into the real economy, which can lift productivity and add to the long run growth rate.
While we have a positive bias overall, there are risks we want to actively monitor. The focus areas include the funding impact from the financial deleveraging directive, and the likely slowdown from the real estate sector. Global growth, which we have assumed to remain robust, and the pace of Fed tightening will also bring secondary impact to our China view.