2019 - Macro Outlook
The annual Central Economic Work Conference (CEWC) held by top leaders December 10th-12th emphasized “stabilities.” We believe that “around 6%” is the likeliest 2020 growth target. Infrastructure investment was mentioned, suggesting that infrastructure spending will be used to support the economy, if growth slows notably below 6%.
The good news that “phase 1” of a China-U.S. trade agreement, which includes a reduction of U.S. tariffs on Chinese goods, and an increase of foreign investor access to China, may be signed in early 2020, has cheered the markets. There are more optimistic expectations for the global economy next year, although we may see a ceasefire rather than a peace treaty.
Growth was recovering in November, mostly due to a private investment boost. Industrial output was up 6.2% y/y, representing a strong recovery, and up 1.5 pps from October, and 1.2 pps from Q3. Investment was up 5.2% y/y, up 1.8 pps from October and up 0.5 pps from Q3. Private investment was up 6.9% y/y, and up 4.3 pps from Q3. The adjusted growth rate for retail sales of social consumption goods was 4.9% y/y, down 0.8 pps from Q3.
Imports were up 2.5% y/y in November, up 5.4 pps from Q3, temporarily escaping the negative growth zone. Exports were up 1.3% y/y, instead of down 2.6 pps, as happened in Q3. CPI was up 4.5% y/y in November, up 0.7 pps from October, and up 1.5 pps from September. CEWC conference speakers did not mention inflation. This indicates that the current high inflation, driven mostly by meat prices, is considered a micro issue, and won’t significantly influence future monetary policy changes. The ex-factory price index of industrial goods fell -1.4% y/y, up 0.2 pps from October. PPI fell -2.2% y/y, down 0.1 pps from October. M2 rose 8.4% y/y, down 0.2 pps from October. M1 rose 3.5% y/y, up 0.2 pps from October.
Housing prices have stabilized, after the 2015 and 2016 boom. The CEWC conference stated that the direction of housing policy in 2020 would be stable. People’s Bank of China Governor Yi Gang had also mentioned earlier a plan to apply countercyclical action to the real estate industry. Since real estate plays an important role in the Chinese economy, we expect the stabilization policy to ease concerns of potential risks that real estate poses to the macroeconomy. Our confidence is based upon China’s strong fundamentals, the fact that few alternative investment channels are available, and strict real estate purchase restrictions.
Major economic indicators are still mostly falling in October. Industrial output rose 4.7% y/y, comparable to July and August. Investment rose 3.4% y/y, down 1.3 pps from Q3. Retail sales of social consumption goods rose 7.2% y/y, and its real growth rate was 4.9% y/y, down 0.4 and 0.8 pps from Q3 respectively.
In October, exports rose 2.1% y/y, and imports fell -3.5% y/y, down1.8 and 0.6 pps from Q3. Export to US fell -13.8% y/y, but up 6.2 pps from September. Trade surplus is enlarging dramatically, and rose 36.6% y/y.
Since July, societal financing scale was slowing, and rose only 0.8% y/y in Q3, steeply falling from 40.6% and 22.4% y/y in Q1 and Q2 respectively. In particular, it fell -16.1% y/y. M2 was up 8.4% y/y, and M1 rose 3.3% y/yin October. Both are basically stable.
In October, CPI appreciated largely and rose 3.8% y/y, up 0.8 pps from September. The driving factor is only meat price. Meat price appreciation is publicly viewed as cyclical, and not sustainable. Ex-factory price index of industrial goods rose 0.1% m/m, and fell -1.6% y/y, down 0.4 pps from September.
The PPI, seen as a key indicator of corporate profitability, fell -1.6% in October from a year earlier, marking the steepest decline since July 2016. This aligns with other indicators showing shrinking manufacturing activity in October, with the official PMI indicating contraction for a sixth straight month. Both reflect weak domestic demand from growth slowdown and external demand from trade war. They also indicate future insufficient growth source. In response, on November 20th, China for the first time since 2016 cut the interest rate in its one-year MLF loans by 5 basis points. A future interest rate cut is constrained by the current high inflation.
The economy is showing various signs of weakening. In Q3, GDP was up 6% y/y, down 0.2 pps from Q2, and down 0.5 pps from Q3, 2018. Industrial output was up 5% y/y, down 1 pp from Q3, 2018. Investment was up 4.7% y/y, down 0.8 pps from Q2.
Retail sales of social consumption goods were up 7.6% y/y, down 1 pp from Q2, and down 1.4 pps from Q3, 2018. Sales’ real growth rate was 5.7% y/y, down 0.8 pps from both Q2 and Q3, 2018. Imports fell 2.9% y/y, down 5.2 pps from Q2, and down 21.9 pps from Q3, 2018. Exports rose 3.9% y/y, down 1.8 pps and 6.4 pps from Q2 and Q3, 2018 respectively. The trade declines were mainly caused by the weakening global economy, and trade war with the United States.
In Q3, CPI rose 2.9% y/y, up 1.1 pps from Q1, continuing its appreciation trend. Producer prices turned to negative growth. The ex-factory price index of industrial goods fell 0.8% y/y, and PPI fell 1.2% y/y, both down 1.3 pps from Q2. Higher CPI raised policymakers’ concern, leading to tightening monetary policy. At the end of September, M2 was up 8.4% y/y, the same as in June. M1 was up 3.4% y/y, down 1 pps from the end of June.
On October 23,the State Council announced 12 detailed measures to better facilitate cross-border trade and investment, including by improving foreign exchange management, and by further streamlining regulatory requirements, with a view to using a more enabling business environment to attract foreign investors. We believe these detailed plans complement the central leadership’s promise early this year of keeping China more open, in contrast to the rise of protectionism in some other countries. The plans are very detailed, and are expected to have an immediate positive impact on trade and foreign investment, and therefore on aggregate economic growth.
Growth is slowing further. In August, industrial output was up 4.4% y/y, down 0.4 pps from July, while investment rose 4.2% y/y, down 1.3 pps from Q2.
Retail sales of social consumption goods were up 7.5% y/y in August, down 1.1 pps from Q2. The indicator’s real growth rate was 5.6% y/y, down 0.9 pps from Q2. Exports were stable, but the import growth rate was plunging. Exports were up 2.6% y/y. Yet recent export growth was rather volatile. The July-August combined growth rate was 5.9% y/y, almost the same as in Q1 and Q2. The much lower export growth to the United States was compensated for by exports to ASEAN countries, and to Taiwan. Imports fell -2.6% y/y, down 4 pps from H1.
CPI was up 2.8% y/y in August, the same rate as in July. Its main components, however, changed significantly, with pork prices skyrocketing due to the sharp reduction of production caused by the previous spread of African swine fever. At the same time, producer prices fell further, and the growth rate turned negative. The ex-factory price index of industrial goods fell -0.8% y/y, and PPI fell -1.3% y/y, down 0.5 and 0.7 pps from July. The major decline in growth rates is mainly due to last year’s high base numbers. We expect this decline to slow by the end of this year. Principal financial indicators are largely stable. At the end of August, M2 was up 8.2% y/y, close to its July rate. M1 was up 3.4% y/y, up 0.3 pps from July.
On September 10th, the State Administration of Foreign Exchange (SAFE) removed the investment quota limitations on two inbound investment schemes: the Qualified Foreign Institutional Investor (QFII) program, and the RMB Qualified Foreign Institutional Investor (RQFII) program. On September 23rd, Standard & Poor's Dow Jones indices included China A-Shares to S&P DJI's Global Benchmark Indices, after the MSCI index’s inclusion. The index company’s response to the inclusion attributed the sole reason to overseas investors’ increased interest in the Chinese market. The bond market also exhibits this internationalization trend this year, such as via the Bloomberg index’s inclusion of the China bond market. Institutional investors with careful analytical tools run contrarily to the negative trade war sentiment. More financial integration will improve China’s capital allocation and market efficiency. This also benefits Chinese firms, by lifting their competitiveness both directly and indirectly, and will increase their internationalization.
Growth slowed in July. Industrial output was up 4.8% y/y, down 0.4 pps from both April and May, falling to a record low rate. The main causes were low investment and consumption, sentiment mostly driven by “trade war.” Investment was up 5.1% y/y, down 0.4 pps from Q2, and down 2.4 pps from Q4 2018, a clear declining trend. Retail sales of consumer goods were up 7.6% y/y in nominal terms, down 1 pps from Q2. Their real growth rate was 5.7% y/y, down 0.8 pps from Q2.
Though trade tensions persist, imports fell more than exports. Imports in dollar terms fell -5.9% y/y, more than in either Q1 or Q2. Exports rose 2.8% y/y, up 1.4 pps and 4.4 pps from Q1 and Q2, respectively. The direct contribution of net exports to GDP was positive, reconfirming our view that trade war “noise” affects China mainly via sentiment.
Producer prices fell. The ex-factory price index of industrial goods fell -0.3% y/y, and -0.2% m/m. This is the first negative growth since September 2016. PPI fell -0.6% y/y in July, and decreased -0.2% m/m, down 0.3 pps from June. We forecast PPI to decline further, but by a moderate magnitude. CPI rose 2.8% y/y, up 0.1 pps from June. CPI is not expected to rise higher. Main financial indicators fell. M2 rose 8.1% y/y, M1 was up 3.1% y/y, down 0.4 and 1.1 pps from June.
On August 5th, after a Tweet by U.S. President Donald Trump, the U.S. Treasury Department announced it would label China a “currency manipulator.” That day the yuan dropped to below 7 to the dollar, for the first time in over a decade (although the magnitude of the drop was small, as the yuan has hovered around 6.9 for a significant amount of time). Our data shows that the yuan has experienced several similar depreciations in recent years. The “currency manipulator” label seems baseless, according to the United States’ own unilateral standards. But Trump’s accusation is understandable, because Trump is viewed through the prism of huge re-election pressure, and wants a deal before the election. So the Chinese government is simply waiting. Yuan depreciation should be temporary, as it’s driven by the negative sentiment of trade war. In the long term, fundamentals point to a more or less stable yuan.
GDP rose 6.2% y/y in Q2, down 0.2 pps from Q1. Industrial output rose 5.6% y/y, down 0.9 pps, but notably, was up 6.3% y/y in June, obviously higher than in April and May. We judge the unusually high June growth to be a seasonal phenomenon, and unsustainable.
Fixed asset investment was up 5.5% y/y, down 0.8 pps from Q1. In particular, it rose 6.3% y/y, faster than in April and May. Real estate investment rose 10.3% y/y, down 1.5 pps from Q1. This could be an indicator of real estate investment growth turning downward. Retail sales of social consumption goods rose 6.5% y/y in real terms, down 0.4 pps from Q1 -- even though this incorporates the high June number -- due to automobile sales deregulation.
Exports in dollar terms fell -1.6% y/y, down 3 pps from Q1. Export is shifting to the European Union from the United States, because of the ongoing U.S.-China trade war. Exports to the EU rose 9.7% y/y, while exports to the U.S. fell -2.1% y/y, up 1.6 pps from Q1. Imports rose 2.3% y/y, up 1.9 pps from Q1.
CPI stopped appreciating. In June, CPI was up 2.7% y/y, the same rate as in May.
M2 was up 8% y/y at the end of June, down 0.3 pps from May. Although this growth has decreased just a bit, it has reached a new historical low. M1 rose 6.6% y/y, up 0.6 pps from May. Saving deposits rose 5.5% y/y, down 0.2 pps from May, and down 5.2 pps from June 2018.
President Jinping Xi announced, on June 28th at the G20 meeting at Osaka, that China would further open its market, proactively expand imports, continuously improve its business environment for foreign enterprises, and press ahead with negotiations on economic and trade deals. Just two days later, on June 30th, the National Development and Reform Commission and the Ministry of Commerce jointly issued two new “negative lists,” and one “encouraged catalogue,” both indicating improved terms for foreign investment. The number of items on the 2019 national FI [foreign investment] negative list was cut to 40 from 48, and to 37 on the FTZ list. The 2019 FI negative list further opens the services, agriculture, mining, and manufacturing sectors.
We expect China to open up more sectors, especially where the country lacks a strong comparative advantage, such as in services. By contrast, even though U.S. President Donald Trump promised, while meeting with Xi at the G20, that his administration wouldn’t’t levy more tariffs on Chinese goods, Trump’s record of keeping his word is not trustworthy -- to wit, July reports say he does want to add more tariffs. Yet economic globalization is very hard to reverse. Even Trump is realizing that restricting U.S. companies from working with Huawei would hurt U.S. companies’ exports to Huawei. This trade war may last for awhile -- but in the long run, globalization will prevail.
Growth is facing downward pressure. Industrial output rose 5% y/y, down 0.4 pps from April, reaching a new low rate. Investment rose 4.4% y/y, down 1.3 pps from April. The decrease of investment growth rate is mainly affected by state investment because of fiscal deficit pressure. State investment rose 5.6% y/y in May, down 4.2 pps from April. In May, fiscal revenue fell -2.1% y/y, down 7.4 pps from January-April, putting further constraint on state investment. Real estate cooled further.
Retail sales of social consumption goods were up 8.6% y/y in May in nominal terms. The adjusted growth rate was 7.9% y/y, down 0.4 pps from Q1. The adjusted real consumption rose 5.7% y/y, down 1.2 pps from Q1. Trump’s trade war is still ongoing. Even the current negotiation positive sign cannot be taken seriously as he likes to and repeatedly played uncertainty card. Overall, trade was very volatile. In May, the smoothed export growth rate was 5.5% y/y, down 1.2 pps from Q1, down 4 pps from last Q4. The smoothed import growth rate was around 1% y/y, down 8.5 pps from last Q4.
After main financial indicators had large drops in April, they are relatively stable in May. In the end of May, M2 rose 8.5% y/y, comparable to April. M1 rose 3.4% y/y, up 0.5 pps from April.
London-Shanghai connect was initiated on June 17th and foreign companies can list their shares in mainland China for the first time. These will enable firms listed in the UK and mainland China to raise funds on each other’s stock market. This is a continuation of effort in more financial openness, in line with the easing of restrictions on foreign fund manager outflows from China, Beijing on June 12, 2018 lifted the monthly cap of 20 percent on the outflows that investors want to take out China via QFII scheme. More financial openness is consistent with China’s overall policy line in contrast to Trump’s trade protectionism. We expect financial openness will improve China’s capital usage efficiency. We do believe that foreign investors, particularly the professional institutional investors will flow more into China compared to the other way around.
Almost all major economic indicators are falling. Industrial output was up 5.4% y/y, back to its low January-February level, after its March rise. Fixed asset investment was up 5.7% y/y in April, down 0.6 pps from Q1.
Retail sales of social consumption goods were up 7.2% y/y in nominal terms, reaching their lowest growth rates in recent years, down 1.1 pps from Q1. Real sales growth was up 5.1% y/y, down 1.8 pps from Q1.
CPI was up 2.5% y/y in April, a rise of 0.2 pps from March. Monetary loosening has seemed to stop. In April, the societal financing scale turned to negative growth, after its quick uptick in Q1; this led principal financial indicators to fall. At the end of April, the M2 money supply was up 8.5% y/y, down 0.1 pps from March.
National budget revenue was up 2.8% y/y, down 3.4 pps from Q1, with spending up 15.9% y/y, up 0.9 pps from Q1. Such a large budget deficit is historically very rare, happening only in 1990 and 1995, when it constrained future fiscal expansion.
Exports in April were up 3.1% y/y, down 3.6 pps from Q1, and down 6.4 pps from Q4 2018. Imports were up 10.3% y/y, and up 9.9 pps from Q1. In April, trade with the United States worsened further. Exports to the United States fell -7.9% y/y, down 4.2 pps from Q1, while imports fell -21.4% y/y, down 1.9 pps.
The U.S.-China trade war is escalating. On May 5th, U.S. President Donald Trump said previous U.S. tariffs of 10% levied against $200 billion worth of Chinese goods would be raised to 25% on May 10th. China announced it would raise tariffs on $60 billion worth of U.S. goods. On May 21st, following pressure from the U.S. government, Google suspended Huawei's access to Google services and apps, to reduce Huawei’s competitiveness.
Trade war is hurting both China and the United States, and global trade as well. The uncertainty generated by trade war has reduced investment in China – or has at least made many investors delay their projects, since last year. Negative market sentiment can be seen from the major stock market drop. This also hurts technological advancement, although it’s hard to hinder technology spillover amid today’s fast and transparent information flow. On April 2nd, the WTO trimmed its 2019 global trade growth forecast to 2.6%, from 3.7%. Countries on the global supply chain are suffering. Singapore, for example, which relies heavily upon the global supply chain, saw its economic growth drop to decade low, of 1.2% GDP growth in Q1. A global slowdown would in turn hurt both China and the United States.
The Chinese economy began to rebound in Q1, with GDP up 6.4% y/y, flat on Q4 2018. Industrial output was up 6.5% y/y, up 0.8 pps from Q4. Then in March, GDP rose a powerful 8.5% y/y, up 1.4 pps from Q4, to its fastest growth rate since August 2014.
Investment, up 6.3% y/y, showed no clear trend. State investment was up 6.7% y/y, up 8.3 pps from Q3 2018, signaling government’s intention to keep supporting the economy.
Retail sales of consumption goods was up 8.3% y/y in Q1 in nominal terms, flat on Q4. Sales’ real growth rate was 6.9% y/y, up 0.9 pps.
Exports were up 6.7% y/y, down 1.8 pps, while imports rose 0.3% y/y, down 9.2 pps. The net export impact on China’s GDP was positive.
In March, CPI was up 2.3% y/y, and up 0.8 pps from February. The ex-factory price index of industrial goods and PPI rose 0.4% and 0.2% y/y respectively, and the main financial indicators also rose. At the end of March, M2 was up 8.6% y/y, up 0.5 pps from the end of 2018. In a strong recovery, M1 rose 4.6% y/y, up 3.1 pps from the end of 2018. Savings deposits from non-financial institutions were up 7% y/y, up 3.2 pps from 2018.
The second Belt and Road Initiative Forum hosted 37 countries in Beijing during the week of April 24th, with eight more countries participating since the last forum two years ago, including two new EU countries, Austria and Portugal. The initiative and dialogue forum will enhance global economic cooperation. The recent nexus of economic and geopolitical friction, such as the Huawei conflict with the Canadian government, requires negotiations. In our view, the Chinese government not only uses policy instruments to smooth over domestic economic cycles, but also tries to calm the international business cycle, adding strategic international investment. This can be seen from the relatively stable exchange rates, in external accounts, and in FDI and ODI.
Prime Minister Keqiang Li announced during his annual address to the People’s Congress of Beijing on March 5th that China’s growth target for 2019 would be in the 6% to 6.5% range. Another key takeaway is a significant 3 pps cut in value-added tax rate for manufacturers, to 13%.
Industrial output was up 5.3% y/y in January-February, a record low rise, and down 0.4 pps from Q4 2018. The slowdown was mainly caused by weakening auto industry output, and a plunge in exports. Fixed asset investment was up 6.1% y/y, down 1.4 pps from Q4, but 1.6 pps higher than the lowest rate seen in 2018, in Q3. It’s hard to conclude a clear trend for investment growth. Retail sales of consumer goods were up 7.1% y/y in real terms, up 1.1 pps from Q4. Trade dipped further. Exports were up only 0.1% y/y, down 10.2 pps from the fastest-growing rate, in Q3. Imports were up 1.5% y/y, down 17.5 pps from Q3, and have been sharply declining since November.
CPI rose 1.6% y/y in February, down 0.7 pps from its highest growth rate, in Q3 2018. We expect the CPI to fall further. For producer prices, the ex-factory price index of industrial products and PPI were up 0.1% and -0.1% y/y, down 4.6 pps and 5.3 pps from its fastest growth rate of 2018. In January-February, M1 rose 2% y/y, up 0.5 from the end of 2018, M2 was up 8% y/y. The total financing scale jumped 25% y/y, in contrast to -14.1% y/y in 2018, possibly to keep future money growth afloat.
On March 15th, at the end of its annual policy conference, Beijing passed a new foreign investment law, in which it promised to give foreign firms treatment equal to domestic firms. Government support will apply equally to foreign firms, and their applications for operating licenses won’t be treated differently from their domestic rivals, Beijing announced. Forced technology transfers will be banned. This policy demonstrates China’s commitment to continue opening, consistent with previous government claims. The equality law will compensate for the negativity from growth slowdown and trade war. We expect FDI, crucially built on investor confidence, might rise, though FDI has already been stable.
GDP rose 6.6% y/y in 2018, down 0.2 pps from 2017. Growth rates declined each quarter throughout the year, falling from 6.8% y/y in Q1 to 6.4% y/y in Q4. Industrial output was up 6.2% y/y, down 0.4 pps from 2017. The manufacturing sector is the main reason for growth slowdown, and growth there fell from 7% y/y in Q1 to 5.7% y/y in Q4.
Consumption was up 9% y/y in nominal terms, and 7% y/y in real terms, down 1.2 and 1.9 pps from 2017, respectively. In 2018, exports were up 7.1% y/y, down 3.7 pps from 2017. Imports rose 12.9% y/y, down 5.8 pps from 2017. Exports slowed sharply at yearend, rising only 0.2% y/y in December. Imports also slowed, mainly in November and December, up 7.8% y/y and -3.1% y/y respectively. We believe trade war might be a main factor, even though net exports comprise a small share of Chinese GDP.
Producer prices fell in 2018, and are expected to fall further in 2019, in the current tightened monetary policy environment. The ex-factory price of industrial goods rose 3.5% y/y, and PPI rose 4.1% y/y, down 2.8 pps and 4 pps from 2017. CPI instead rose 2.1% y/y, up 0.5 pps from 2017, driven mostly by rising food and gas prices.
At the end of 2018, M1 rose 1.5% y/y, down 10.3 pps from the end of 2017. Savings deposits from non-financial enterprises fell -0.7% y/y, down 11.3 pps from the end of 2017. M2 rose 8.3% y/y, and down 0.4 pps from last year. The shadow banking sector, such as trusted loans, has shrunk, largely due to the effects of financial risk regulation. We believe the Chinese government is mainly using fiscal instruments to boost growth, and that monetary policy won’t change much in 2019.
Investment was up 5.9% y/y in 2018, and up 0.5% y/y in real terms, down 1.3 pps and 0.8 pps, respectively, from 2017. However, in Q4 investment rose, and was up 7.5% y/y, up 3 pps from Q3. In response to December’s annual Central Economic Work Conference plan to increase fiscal support, the State Council approved a 2019 quota for new local government bond issuances of 1.39 trillion yuan, enabling local authorities to start issuing debt from January, ahead of the usual schedule. Moreover, externally, FDI rose 3% in 2018, to $135 billion. Commerce Minister Zhong Shan stated on January 13th that China would reduce restrictions on foreign investment, and address difficulties facing foreign companies investing in China. The investment boost is necessary, as the current slowdown is mainly due to the uncertain global geopolitical environment. We also expect capital allocation efficiency to be enhanced, after the intensive anti-corruption campaign running since 2013.