News Analysis: Chinese economy sees rosy start, pressure remains

The Chinese economy was off to a good start in the first quarter, with the real economy gaining momentum thanks to previous policy stimulus and ongoing economic rebalancing.

China's exports staged a surprising turnaround in March by surging 18.7 percent in yuan-denominated terms year on year, while a decline in imports narrowed, customs data showed on Wednesday.

Consistent with the improvement in trade data, China saw stronger electricity consumption and railway freight growth in Q1.

The Q1 data point to a small improvement in growth momentum for the real economy, especially domestic demand, from stronger fiscal easing and increased property investment growth, according to a research note from Japanese securities trader Nomura.

"There is sufficient evidence that the Chinese economy had an auspicious start in Q1," said Zhao Chenxin, spokesperson with China's top economic planner, citing positive changes in investment growth, steady prices, rising business profits, a warming property market and higher fiscal revenue.

The International Monetary Fund (IMF) also showed similar confidence about China's economic outlook. It raised its forecast for China's economic growth in the near term and said a successful rebalancing of its economy is likely.

The Chinese economy is expected to expand 6.5 percent in 2016 and 6.2 percent in 2017, both up 0.2 percentage point from the IMF's predictions in January, according to the IMF's flagship report, World Economic Outlook (WEO), released on Tuesday.

The upgrade reflects China's announced policy stimulus and the trend of robust growth in the service sector offsetting weakness in manufacturing, said the IMF.

The welcome recovery in exports is consistent with the stabilization of new export orders tracked as part of the PMI reading in March. Combined with better-than-expected PPI inflation data, economic activity data is expected to improve in March, according to the HSBC report.

China is scheduled to release its first-quarter GDP as well as consumption, investment and industrial output data on Friday.

Chinese securities traders' analysts predicted a bullish stock market to come on expectations of stronger economic recovery. China's stocks staged a rally on Wednesday with the benchmark Shanghai Composite Index rising 1.42 percent.

"That said, it is still too early to conclude that China's export growth has emerged from the woods just yet," the HSBC report said, adding that the recovery remains fragile as economic growth in China's major trade partners, such as the United States and EU, is set to slow in 2016 compared to 2015.

Meanwhile, structural headwinds such as housing oversupply, high leverage and overcapacity remain. This, together with a normalization of financial sector growth, may suggest a gradual slowdown, according to Nomura.

Chinese Premier Li Keqiang pointed out on Monday that though positive changes are increasing in the economy, the foundation of economic performance is not yet stable. Li made the comments while presiding over a State Council special workshop on full replacement of the business tax with a value-added tax (VAT).

The VAT reform would be the most significant step for tax reduction in recent years and is expected to reinforce the current economic performance while sustaining momentum for future development, according to Li.

HSBC expects domestic demand to remain the key driver of China's economic growth in 2016, and more proactive policy easing is still warranted, such as rate cuts of 50 bps, reserve ratio cuts of 350 bps and stronger fiscal stimulus.

There could be substantial spillover effects from China's transition toward more sustainable growth focused on consumption and services, but "ultimately, that process will benefit both China and the world," said the IMF. Endi