China’s economic activity remained strong in the first quarter, with hiring close to a record high, but the outlook is cloudy as two key growth engines – property and commodities – show signs of cooling, a private survey showed on Wednesday.
While first-quarter revenue looked strong, every sector except manufacturing saw profit growth weaken from late 2017, while investment and cash flow softened, according to the quarterly survey of thousands of Chinese firms by China Beige Book International (CBB).
Weakness in the retail sector is of particular concern, with domestic demand hardly looking robust enough to support growth if China’s exports suffer from punitive U.S. trade measures, CBB added.
“A cloudy 2018 outlook certainly beats a downbeat one, but just a few months ago China’s strong finish to 2017 led most observers to believe that last year’s momentum would carry meaningfully through this year,” CBB wrote in a note discussing its first-quarter findings.
“Still, the pace (of growth) at the end of 2018 will not match the halcyon days of 2017, even without a trade shock or any meaningful deleveraging.”
Defying expectations for a winter lull, Chinese steel companies continued to ramp up output in response to strong sales, and also boosted borrowing, capital expenditures and hiring, the survey showed.
The consensus view had called for a slowdown in production as Beijing cracks down on industrial pollution and closes older, less efficient mills.
Despite Beijing’s pledge to continue to reduce excess capacity, the steel sector hiked overall capacity for the eighth straight quarter, CBB said.
“The tougher question is what’s going to drive growth a year from now. Property and commodities both need an extended breather, and it’s difficult to imagine the surprising manufacturing performance of the last two years continuing much longer.”
China’s high-flying property market is cooling, with developers responding to weaker sales by slowing down investment and new housing starts, the survey showed.
The retail sector also continues to lag other industries, notably in the form of the biggest quarter-on-quarter decline in sales prices seen for the sector.
CBB also discounted the view that rising demand from China could lead to it exporting inflation globally, as firms said wage, input cost and sales price inflation have been steady or declining for the past three quarters.
The survey also showed that corporate borrowing remained steady in the first quarter, despite rising interest rates as regulators crack down on riskier financing practices.
Most analysts who forecast slower economic growth for China this year cite the cooling property market and higher borrowing costs as the main expected drags on activity.
But CBB noted regulators have largely focused their attentions so far on the financial sector and shadow banking rather than reining in corporate debt, which would risk curbing economic growth.
“Banks and non-banks do feel pressure to shrink their off-balance sheet transactions, but this is not the same as deleveraging,” CBB said.
Economists polled by Reuters expect China’s growth to cool to 6.5 percent this year from 6.9 percent in 2017.