Chinese equities caught investors by surprise in 2017 with a strong rally. Contrary to the pessimism over the past few years, investors have turned upbeat toward China, and for good reason: Economic data in general exceeded expectations, and we have seen broad-based earnings growth.
For 2018, we are expecting a moderation of growth. That said, there are several encouraging signs that are worth monitoring. In our view, these will be supportive for a transition to better quality growth:
• Progress in deleveraging
• Supply-side and state-owned enterprise (SOE) reforms
• Industrial innovation
• Structural southbound liquidity
• MSCI A-share inclusion
Growth expected to moderate in 2018
We are of the view that gross domestic product (GDP) growth will gradually moderate in 2018 from 2017 levels, but should be on track to deliver the government’s target of around 6.5% growth.1 We believe consumption and services are the structural drivers for China’s GDP growth going forward. Income growth continues to be strong in the high single digits. We believe consumption and services will continue to drive the economy in 2018, as underpinned by urbanization and rising income trends.
Investments and exports are expected to soften going into 2018. However these are less of a concern in our view. Exports, for instance, are unlikely to become a key growth contributor, given that China’s export share to G3 economies has largely stagnated since the start of this decade. We expect the Fixed Asset Investments (FAI) in real estate to slow, as that is in line with the overall policy to prevent a property bubble. We believe the government’s shift toward a Private-Public-Partnership (PPP) model, with the aim to attract private sectors to co-invest, is a very encouraging sign.
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1Source: Xinhuanet. The Chinese government set the 2017 growth target of around 6.5% during the annual National People’s Congress (NPC) held on March 5, 2017.