China's Industrial Economy 2018 Q1 Report

Abstract

In Q1, the Business Sentiment Index stood at 51, indicating an expansion, albeit small, for the first time in four years. This expansion, mainly driven by state-owned and foreign firms, has been largely due to the optimistic expectations of future operating conditions. Private firms – the vast majority of industrial firms – stayed flat (50). In addition, production, electricity consumption and both foreign and domestic orders, with the diffusion indices ranging between 47 and 49, showed signs of slight contraction. Investments were still weak. Overcapacity remains the biggest challenge, suggesting a continued need to curtail production capacity. In addition, persistent rises in raw material costs and the resulting price inflation since 2016 Q4 may hinder the recovery of the industrial economy. Overall, supply-side reform has made positive progress in solving the structural problems of China’s industrial economy. The industrial economy continues an L-shaped long-term trend, stable and with noticeable signs of improvement. Given the government’s strong commitment to economic development, we remain optimistic about the long-term outlook of the Chinese economy.