Macroscope | Five reasons why the consensus reading of China’s 2017 economy was so wrong

This year has turned out to be one of positive macroeconomic surprises. The global economy grew at its strongest and most synchronised pace in years, with benign inflation keeping central banks at ease. Financial markets were sheered by fading political risks in Europe and reduced protectionism concerns from the US.

While geopolitical tensions in North Korea and Catalonia’s declaration of independence have, at times, dominated news headlines, these were mostly sideshows that were readily shrugged off by investors. With no major hiccups in the coming weeks, the global economy is on track to deliver their best performance in seven years.

Closer to home, the remarkable turnaround in China has been a big surprise to many. Contrary to intense hard-landing concerns that had led to equity and credit market sell-offs, the renminbi’s depreciation and massive capital outflows in the last two years, 2017 has turned out to be a year of redemption, with stellar performance in many Chinese markets that blew away even the wildest expectations.

Take equities as an example; the MSCI China Index has surged by a whopping 52 per cent year-to-date, on track to be the best performing market globally.

The renminbi has appreciated by 5.1 per cent onshore (CNY) and 5.4 per cent offshore (CNH) against the US dollar, a result that no one would have considered possible 12 months ago. Even capital outflows, which were feared of leading China to an impending crisis, have eased off markedly, leading to a rebound in China’s foreign exchange reserves to above US$3.1 trillion.

These dramatic shifts in asset prices and investor sentiment have made China, in our view, the biggest macro surprise of all in 2017.