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China Goes Shopping For A Strong Economy


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What's going on?

Data out on Tuesday showed China’s economy brushing off trade war worries to grow by 6.8% in the first quarter of the Year of the Dog. The country’s long-heralded shift to consumption-led growth started to show as consumers wagged their tails – and their wallets.

What does this mean?

Consumers breathed fire into the Chinese economy – accounting for almost 80% of the growth in the period. They also breathed “fire.com” (with ecommerce sales growing by 35%) and “Fire, PhD” (with education investment up more than 25%). This offset weaker-than-expected growth in industrial activity: overall, economic growth was in line with market expectations.

Why should I care?

For markets: The outlook may not be so rosy for the People’s Republic.

Consumption typically contributes more to China’s growth in the first quarter compared to the rest of the year (partially due to Chinese New Year driving up spending), so investors look to other industries to pick up the slack as the year goes on. This year that may be a challenge, given both trade tensions and domestic infrastructure projects being scaled back to keep debt levels under control. Relatedly, China’s announcement this week of a lower “reserve ratio” (the proportion of deposits banks have to keep on hand, as opposed to loaned out to customers) should help provide support to small businesses and return some of the funds that banks owe to China’s central bank.

The bigger picture: China is opening up to the rest of the world.

China recently reiterated its promise to become a more open market. In particular, President Xi aims to increase imports, expand intellectual property protection and lower foreign-ownership limits in sectors like manufacturing – the latter potentially being golden news to the likes of Tesla, Volkswagen and Ford. Previous rules limited non-Chinese auto manufacturers to a maximum 50% ownership of any China-based business. From this year, however, electric vehicle manufacturers will be allowed full ownership, extending to all car makers by 2022.

Originally posted as part of the Finimize daily email.

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