Equal Terms for Foreign Firms

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.