Coronavirus effects may soon be contained in china
The coronavirus outbreak that began in late January was one of the most severe exogenous shocks in China’s recent history, especially since it overlapped with the Chinese New Year holiday, which involves the largest population migration in human history. As of February 26th, some 80,428 cases had been confirmed in China.
The Chinese government is using monetary and fiscal policies to boost the economy. On February 2nd, the People’s Bank of China pumped $174 billion into financial markets. As of this writing, the coronavirus has been largely contained, in terms of consistently lower numbers of new cases in China, due to the state’s strong capacity to enforce curfews, and because production is now being resumed. We are not as pessimistic as our peers, such as the Thomson Reuters aggregate survey, which forecasts 4.5% Q1 growth, as we expect to see at least 5% growth. We expect real estate, banking and transportation to be negatively affected, but believe the medical, infrastructure and health areas may be positively affected.
Because of the long Chinese New Year holiday, the statistics bureau, as usual in January, only announced price and financial data. The coronavirus won’t have any real effect on the economy in January, but its impact will show up in February data.
CPI was up 5.4% y/y in January, and up 0.9 ppts from December 2019. We expect the coronavirus to have a larger effect on February data, and to contribute to a higher CPI.
Producer prices were basically stable in January. The ex-factory price of industrial goods was the same as last month, and was up 0.1% y/y, and up 0.6 ppts. PPI fell -0.3% y/y, up 1 ppts from December, and 0.2% m/m.
The coronavirus has not yet shown a significant effect on financial indicators, and the main financial indicators have so far been basically stable. At the end of January, M2 was up 8.4% y/y, and down 0.3 ppts from the end of December. But M1 growth was down 4.4 ppts. Loans from financial institutions were up 12.1% y/y, down 0.2 ppts from December.
With trade uncertainty eased, 6% growth target can be achieved
The United States and China on January 16th struck a "phase one" trade deal, at least easing uncertainty over the future of U.S.-China trade relations. Exports raised 5% y/y in 2019, down 2.8 pps from 2018, while imports raised 1.2% y/y, down 11.6 pps.
GDP raised 6.1% y/y last year, down 0.5 pps from 2018. Industrial output raised 5.7% y/y, down 0.5 pps, while investment raised 5.4% y/y, down 0.5 pps.
Fiscal revenue was up 3.8% y/y in January-November 2019, down 2.7 pps from the same period in 2018. Fiscal expenditure was up 7.7% y/y, up 0.9 pps. So the fiscal deficit is rapidly expanding, constraining government’s future fiscal expansion.
CPI was up 4.5% y/y in December, and up 2.6 pps from December 2018. Producer prices have been growing more slowly in 2019. PPI in December fell -1.3% y/y. PPI has been on its steepest decline since July 2016. The official PMI indicated contraction for a sixth straight month. Both reflect weak domestic demand due to growth slowdown. In response, for the first time since 2016, China on November 20th cut the interest rate on its one-year MLF loans by 5 basis points.
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. The conference stated that the direction of housing policy in 2020 would be stable. We expect the stabilization policy to ease concerns of potential risks that real estate poses to the macroeconomy. Our confidence is based on China’s strong fundamentals, and strict real estate purchase restrictions.
On January 14th, the U.S. Treasury department dropped China’s designation as a “currency manipulator.” Onshore RMB instantly jumped by 0.2%, its highest level since July. Non-banks also showed net FX inflows of around $6 billion in December. We expect all of these indicators to improve significantly in 2020. Our faith is built upon China’s still-strong fundamentals, relatively peaceful U.S.-China relations in a U.S. election year, and China’s high capital return.
2020 growth target likely to be about 6%
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.
Belt and Road Summit 3rd Edition
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After the first edition held in Venice, Italy and a second edition in Shenzhen, China, the Belt and Road Summit goes back to Europe, gathering the community of Eurasian business leaders inTrieste. The city and the port of Trieste represent a key logistics hub in the North Adriatic Sea connecting the East to the West, and a historical crossroad of culture between Southern Europe, the Germanic world, and the Balkans.
The summit is aunique platformto establish and build longstanding relations peer-to-peer withbusiness and institutionalcounterparts from themost relevant Eurasian Countriesactive along the Belt and Road Initiative.
After the first two editions focused respectively on understanding what the Belt and Road Initiative is and what actions should be initiated to unleash its potential, the third edition increasingly focuses on concretebusiness to business cooperation and industrial opportunitiesin the countries located along the maritime and land routes.
Date: November21, 2019
Venue: Maritime Station, Trieste, Italy
Host: CDI, The European House – Ambrosetti
Theme: Successful businesses in the way ahead
Winning proposition
Author: ZhangYuge, Director, Hong Kong and Macao Research Department, CDI
Macao should take advantage of the plan to develop the Guangdong-Hong Kong-Macao Greater Bay Area to diversify its economy.
Macao has realized prosperous and stable socioeconomic development since its return to the motherland. However, moderate economic diversification is the key to better implementing the "one country, two systems" principle in the future.
Since the Macao Special Administrative Region government released policies to promote economic diversification in 2004, its economic landscape has not changed much. Macao still has a long way to go in economic diversification. Statistics published by the SAR show that the added value of gambling (including intermediary industries) accounted for 50.5 percent of Macao's GDP in 2018, 4.3 percentage points higher than 2004; in terms of tax revenue, gambling generates 113.5 billion patacas ($14.1 billion) in recurrent income and capital income, making up 80.3 percent of the SAR's total.
Moderate economic diversification is the future for Macao. But how? It will not be achieved solely on Macao's own strengths. Macao needs to ride the momentum of the plan to develop the Guangdong-Hong Kong-Macao Greater Bay Area. On the one hand, it should seek to attract resources from the Greater Bay Area to develop industries independent of gambling; on the other hand, it should develop a headquarter economy to get into the Greater Bay Area market and develop competitive industries.
In the first place, it should develop its financial industry. The traditional manufacturing industry and the service industry are not able to compete with the gambling industry with regard to profitability. The best choice for an alternative is therefore the financial industry. Monte Carlo serves as a good example for this. Macao should take into consideration its own strengths and weaknesses in positioning itself among neighboring cities such as Hong Kong, Shenzhen and Guangzhou. Macao should prioritize developing the bond, commodities and financial derivatives markets to cater to the needs of the Belt and Road Initiative and business cooperation between China and Portuguese-speaking countries. It can develop its wealth management, internet finance and green finance by following the fintech trend in finance and innovative financing. Macao is on the same starting line with other cities in the Greater Bay Area in innovative financing, but it can take advantage of its role as a free port. It should focus on selected areas and develop finance programs with rich resources and mature conditions. It should promote the pooling of financial resources, strengthen its cooperation with Portuguese-speaking countries and enhance cooperation with Hong Kong and Shenzhen as well as with technology and financing companies.
It should also develop its competitive industries such as high-end tourism by promoting education and training. And it should seek to become the tourism education and training center for the Greater Bay Area and cultivate high-end tourism professionals; develop a high-end tourism and leisure industry to cater to the needs of the residents in the Greater Bay Area; strengthen its tourism cooperation with other cities in the Greater Bay Area and develop package tourism itineraries to attract more tourists and customers.
Second, it should accelerate the development of the exhibition industry. The goal should be to establish Macao as Asia's hub for the exhibition industry and build a modern service industry with events and exhibitions at the core. Macao's exhibition industry, with conferences as the priority, should build a multi-level and complementary exhibition market for the Greater Bay Area, boosting the competitiveness of the area as a whole.
Third, it should develop its cultural and creative industry. It should seek to strengthen its position within the coordinated development of the cultural and creative industry in the Greater Bay Area, by building a cultural and creative industry chain.
Fourth, it should bolster the competitiveness of the traditional Chinese medicine industry by developing key technologies. It should develop frontier technologies of traditional Chinese medicine with the support from State Key Laboratories of Quality Research in Chinese Medicine and Shenzhen-Macao Innovation Research Institute of Traditional Chinese Medicine; expand the market of traditional Chinese medicine of Macao using the platform of Traditional Chinese Medicine Science and Technology Industrial Park of Cooperation Between Guangdong and Macao and promote the traditional Chinese medicine industry of Macao internationally, using the World Health Organization Collaborating Centre for Traditional Medicine as the platform for international exchanges.
To realize its moderate economic diversification, Macao should revise its laws and regulations to facilitate the development of new economic forms; adjust its policies for attracting and cultivating talents, which are essential for supporting its economic diversification; attract resources from the Chinese mainland to Macao, give full play to Macao's role as a free port; and enhance the relationship between Macao and Hengqin New Area in the neighboring mainland city of Zhuhai.
PPI Deflation May Be Worrisome
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.
China-New Zealand Think Tanks Seminar
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On October 15th, 2019, the China Development Institute,Scion and the New Zealand China Council jointly held the China-New Zealand Think Tanks Seminar in New Zealand. The participating experts and scholars from China and other countries discussed the new opportunities for cooperation between the two countries in such areas as economy and trade, sustainable development, and new technology under the framework of the Belt and Road Initiative (BRI).
Date: October 15, 2019
Venue: Scion, Rotorua, New Zealand
Host: CDI, Scion and the New Zealand China Council
Theme: China-New Zealand Cooperation on Belt and Road Initiative: Innovation and Breakthroughs
RCEP Can Give Boost to International Trade
Author: ZhangGuoping, Postdoctoral Researcher, CDI
India’s sudden withdrawal has hit negotiations involving 16 countries of the Regional Comprehensive Economic Partnership treaty, which is expected to conclude this year. The RCEP is a proposed free trade agreement between the countries of the Association of Southeast Asian Nations, and six states with which ASEAN has FTAs.
China needs to remain open towel coming India to join the RCEP whenever it is ready, deepen reform and opening-up to benefit countries entering the Chinese market, and mediate among different countries to ease trade frictions to contribute to the conclusion of RCEP negotiations, which can inject fresh impetus to global trade.
With a population of about 3.5 billion, this trading bloc has a total gross domestic product of more than $21 trillion, accounting for more than 30 percent of global trade. If the RCEP is finalized, it will be the world’s largest regional FTA.
The RCEP is more accessible to developing nations. Its framework complements the World Trade Organization by covering traditional issues such as goods trade, dispute settlement and service trade as well as new ones, including investment intellectual property, digital trade, and finance and telecommunication.
It plans to cut restrictions and discriminatory measures especially in the field of service trade. The RCEP can lay the foundation for developing countries participating in the treaty to get involved in higher FTA levels in the future, which is significant for promoting free trade between member countries in the era of globalization.
Since WTO reforms have not yet been launched, the RCEP will offer great opportunities for global trade, especially for China. Due to factors such as the unilateralism of some major countries, the number of permanent WTO judges has come down from seven to three, with the tenure of one of them concluding by the end of this year.
Participation in the RCEP will be an important approach for China to cope with Sino-US trade frictions and stabilize its foreign trade growth in the short term. In the long term, it is expected to promote China’s high-level opening-up and further its participation in regional integration.
China will further expand its economic and trade partners among the RCEP member countries and make greater contributions for maintaining the prosperity of the Asia-Pacific region.
It will also share its experiences and help RCEP member countries enhance confidence in free trade and combine the RCEP framework with the Belt and Road Initiative to produce joint results.
At present, all parties have reached consensus on more than 90 percent of the agreement text. However, the China-United States and Japan-Republic of Korea trade frictions, and India’s withdrawal, continue to pose challenges.
India has concerns about the potential negative impact of imports and lacks confidence in the competitiveness of the domestic industry. It has filed many anti-dumping cases against China, and has established a complicated non-tariff system to protect the domestic market.
In this regard, China first needs to promote to the member countries to adopt more proactive and pragmatic strategies toward the conclusion of negotiations while respecting ASEAN’s dominant role.
China needs to uphold the principle that the 15 RCEP countries can go ahead with the agreement that is open to India, which reflects China’s openness toward foreign cooperation as well as its determination to adhere to multilateralism and trade liberalization.
Second, some Southeast Asian countries are concerned that domestic markets may bear the brunt of China’s exports once the RCEP treaty is concluded. China needs to further reform and open up, show the huge potential of the Chinese market to enterprises and investors of other countries participating in the RCEP, and encourage countries to invest in China and facilitate RCEP negotiations.
The second China International Import Expo recently held in Shanghai allowed foreign enterprises to see the great returns of tapping into the Chinese market and demonstrated China’s confidence as the world’s largest market. The Foreign Investment Law will come into effect in 2020, when foreign investment and business activities in China will be more secure.
Third, China needs to further play its role as a mediator. Since Japan- ROK economic and trade frictions are showing no signs of easing in the short term, China needs to respect the dominant role of ASEAN while continuing to mediate between countries as a major power and promoting countries participating in RCEP negotiations to adopt more proactive pragmatic strategies, which can turn risks into opportunities, and lay the foundation for future negotiations for the China-Japan- ROK Free Trade Zone and the China-India trade agreement.
In the era of globalization, RCEP member countries need to remain open and inclusive, participate in negotiations proactively and promote regional integration to better cope with challenges caused by anti-globalization and trade protectionism.
As the world’s largest regional agreement, the RCEP will serve as a multilateral cooperation platform for member countries, provide a new approach for countries to address problems, advance cooperation in the Asia-Pacific region and give new impetus to global trade.
Greater Bay Area: New Opportunities for the Development of Shenzhen and Hong Kong
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On October 11, 2019, China Development Institute and the AmCham Hong Kong jointly held a seminar on "Greater Bay Area: New Opportunities for the Development of Shenzhen and Hong Kong ". Against the backdrop of the development of the Greater Bay Area, experts and scholars from China's mainland and Hong Kong discussed various topics including the impact of the construction of the Shenzhen demonstration pilot zone for socialism with Chinese characteristics on Hong Kong's economy, challenges faced by Hong Kong's economic and social development, and new opportunities for talent exchange and cooperation in the Greater Bay Area in the future.
Date: October 11, 2019
Venue: Room 101, CDI Mansion, Shenzhen
Host: CDI
Theme: Greater Bay Area: New Opportunities for the Development of Shenzhen and Hong Kong
New deregulation measures expected to boost cross-border trade and investment
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.
