Has China’s Cyclical Recovery Peaked?

There is a rapidly emerging consensus that China’s growth peaked in the first quarter and the economy is facing growing downward pressure.

China’s latest PMI numbers released this week seemed to validate the increasingly consensus view of an imminent growth top. Most major components of the PMI surveys in both the manufacturing and service sectors had setbacks, which is also reflected in softer commodities prices.

Although tighter on the margin, Chinese monetary conditions remain fairly stimulative, which should continue to help the economy. The trade-weighted renminbi is still depreciating, albeit at a slower pace, and real interest rates deflated by PPI remain negative.

On the fiscal front, the government significantly reduced the fiscal stimulus toward the end of last year, but has since reversed course. Both direct fiscal spending and infrastructure investment have picked up notably, and the impact will continue to ripple through the broader economy.

In short, China’s policy settings remain expansionary. This is a major departure from previous years when the Chinese economy was under the heavy weight of policy tightening while external demand also weakened. Our China Investment Strategy team believes there is little chance that the Chinese authorities will commit a similar policy mistake that could lead to a major growth downturn.

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