China’s economy weakens in Q1 despite proactive PBoC policy

China’s economy expanded by 6.7% y/y in Q1 2016 compared to 6.8% in Q4 2015. The qoq growth rate even fell from 1.5% in Q4 to just 1.1% in Q1. The weakness was seen despite a proactive policy easing from the PBoC and the property market rally and is unlikely to be a short-term phenomenon.

"We maintain our below consensus forecast of 6.3% for this year. For 2017, we expect a growth to slow to 5.8% in 2017 due to the property over-supply and debt overhang. Our forecasts are below the growth target range of 6.5% – 7% under the 13th Five-year Plan." said Commerzbank in a report.

While fiscal policy is likely remain proactive, there is a low possibility (less than 20%) of a large scale of fiscal stimulus. Fiscal stimulus will likely exacerbate the over-capacity issue, while having limited impact on boosting underlying demand. PBoC could ease more cautiously amid the recent uptick in CPI prints.

Give strong capital outflows from the economy CNY is still under great pressure to depreciate. Nonetheless, the PBoC is likely to conduct market intervention to prevent a sharp depreciation of its currency, due to concerns of market instability and mounting external debts.