Growth-Stoking Investment Push Is On

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.