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MERICS Economic Indicators Q4/2019: Quarterly analysis

Macroeconomics: GDP growth stabilizes in final quarter

  • China’s economy expands 6.1 percent in 2019 in line with government target
  • Monetary and fiscal stimuli help counter domestic and external headwinds
  • China’s Q4 GDP growth remained stable at 6 percent, the same level as the previous quarter. This stabilization was assisted by looser monetary policy, coupled with an expansionary fiscal policy that saw tax cuts worth around 2.4 trillion CNY rolled out over the year.
  • The tax cuts have added to the financial pressures on local governments. Several provinces and municipalities, including Shandong and Shanghai, have announced lower than expected tax revenue growth.
  • Full year GDP expanded by 6.1 percent in 2019, in line with the official growth target of between 6 and 6.5 percent. This puts economic growth at a comfortable level to ensure the government’s 2020 and 2021 economic development goals of doubling GDP from 2010 levels are reached.
  • Nominal GDP growth slowed from 7.6 to 7.4 percent. Nominal GDP growth was again lower than aggregate credit growth, which grew at 10.7 percent, meaning that each incremental unit of GDP is generating an increasingly larger amount of debt. As debt levels rise, it will become increasingly risky for policymakers to continue supporting the economy through monetary stimulus.
  • A breakdown by sectors shows manufacturing helped overall GDP growth the most. Manufacturing growth rose to 5.9 percent in Q4, up from 4.8 percent in the previous quarter. Service sector growth slowed to 6.6 percent from 7.1 percent while construction slowed by 0.8 percentage points to 5.3 percent.

What to watch: China’s government is likely to introduce more stimulus measures to ensure the economy gets off to a good start in early 2020.

Business: Industrial production slowdown bottoms out in Q4

  • Annual growth of value-added production sinks to record low of 5.7 percent
  • State Council makes cautious efforts to improve the business environment
  • In December, output from State-owned enterprises (SOEs) accelerated to 7 percent, the strongest performance since January 2019. Their recovery helped lift overall manufacturing growth, despite some cooling off at private companies. December’s improved growth figures were partly due to the early Chinese New Year holiday (on Jan 25th) in 2020, as companies rushed to fulfill orders.
  • Alongside a recovery in automobile production, manufacturing activity was also boosted by improved demand for major components. For example, production of integrated circuits surged to 30 percent, while output of chemical materials grew by 7.7 percent in December.
  • Business sentiment improved. The National Bureau of Statistics’ manufacturing Purchasing Managers’ Index (PMI) moved into positive territory (>50) during Q4. The last positive reading was in Q1. Sub-indices on new domestic and export orders have also returned to values just above 50 in the past two months.
  • However, falling demand for commercial real estate indicates persistent caution in the business environment. Sales of commercial space consistently fell over the year, contracting 15 percent in 2019 compared to a contraction of 5.6 percent in 2018.
  • In November 2019, the National Development and Reform Commission (NDRC) released guidelines for deeper integration between of advanced manufacturing and modern service industry. The guidelines elaborate on the strategic direction set out in the government’s Made in China 2025 strategy which emphasizes green manufacturing and strategic financial support. The guidelines also set goals for 2025 and stressed the importance of creating industry-leading companies, or ‘national champions’.

What to watch: The early Chinese New Year holiday has had a distorting impact on Q4 data. Whether the uptick in manufacturing is sustainable will become clearer by the end of the first quarter 2020.

International trade and investment: Uptick in foreign trade growth in Q4 does not signal recovery

  • Export and import growth take a hit in 2019
  • “Phase One” deal with the US prevents further deterioration of trade relations
  • Weaker export and import growth in 2019 was partly a sign of normalization after 2018’s double-digit growth. Tariffs imposed by the United States and China made the slowdown more pronounced. China’s exports to the US fell by 12.5 percent on the previous year (USD terms), while imports of US goods contracted by 20.0 percent. Annual export growth slowed to 0.5 percent, while imports fell by 2.8 percent.
  • Import and export growth both improved significantly during the last quarter 2019, though this does not reflect a recovery in foreign trade. Improvements were driven by weak growth in the reference period during Q4 2018 as well as by orders made prior to the Chinese New Year, which starts on January 25th.
  • The signing of the “Phase One” trade deal forms part of a complex readjustment of Sino-US relations. However, previously imposed tariffs remain in place and the implementation of the agreement will give rise to further conflict over the coming months.
  • China’s currency has recovered following its deprecation over the third quarter when the exchange rate fell to 7.09 CNY to the USD. Over the last quarter, further deterioration in US trade relations was avoided which, combined with signs of improvement in China’s economy, helped lift the CNY/USD exchange rate to 6.8.
  • China’s government has been keen to improve the investment environment for foreign companies recently, to counter increasing international suspicion towards Chinese companies, notably tech giants such as Huawei. The new Foreign Investment Law came into effect January 2020; it aims to reduce restrictions on foreign companies.

What to watch: China’s purchasing commitments of 200 billion USD made as part of the “Phase One” trade deal with the US are likely to affect Chinese imports from other trading partners, including the EU.

Financial markets: Monetary easing drives the market

  • To boost the economy, the central bank again releases more banking reserves
  • Real estate and stocks benefit from the added liquidity
  • Monetary policy in Q4 continued to emphasize economic stimulus, releasing liquidity into the market through a 0.5 percentage point reduction in banks’ required reserves. Large banks are now required to hold 13 percent of their assets in reserve, while smaller banks have also had their reserve requirements cut. Interest rates, driven mostly by policy, have fallen only slightly due to the added liquidity.
  • In November, aggregate financing expanded by 10.8 percent. The government’s focus on lowering financial risk in the economy has moved credit on-balance sheet and into bonds, resulting in bank lending and bond issuance picking up. De-risking has been partially successful as the shadow banking share of total credit has fallen to 10 percent, compared to 12 percent a year before.
  • De-risking remains urgent as 2019 saw record corporate bond defaults. Reports indicate that Chinese companies had defaulted on 120 billion CNY worth of bonds by the beginning of December. This comes close to matching the record defaults of 2018, which saw defaults worth 121.9 billion CNY.
  • Consumer credit’s share of total bank loans outstanding has been growing. By November, it had reached 27.5 percent. The majority of this was mortgages. As real estate prices have been rising over recent years, households find themselves needing to borrow more to buy property.
  • The Shanghai and Shenzhen stock indices have climbed by 25.3 percent and 44.4 percent since the beginning of 2019. Generally, accommodating monetary conditions and inflow through the Hong Kong stock connect mechanism have benefitted stocks. Stocks climbed again in January, driven by expectations of a China-US “Phase One” deal to damp down the trade conflict.

What to watch: China has to perform a delicate balancing act as it attempts to reduce risk, help distressed companies to refinance while simultaneously boosting growth.

Investment: Fixed asset investment recovers after hitting lowest point ever

  • Manufacturing growth drives small uptick
  • Real estate investment slows as property market cools
  • At the end of Q4, year-to-date fixed asset investment was stable on the previous quarter, expanding at 5.4 percent year-to-date. However, both October and November saw the slowest expansion on record, at 5.2 percent. A December uptick of 0.2 percentage points followed.
  • The December uptick was mainly driven by a private sector rebound as investment growth improved from 4.5 to 4.7 percent. SOE investment growth fell slightly by 0.1 percent to 6.8 percent.
  • An industry breakdown shows that investment growth came mainly from secondary industry. In December, investment growth in secondary industry rose from 2.4 to 3.2 percent. The improvement was driven by manufacturing, which rose from 2.5 to 3.1 percent. Investment in energy production also picked up, expanding at 4.5 percent. Mining investment fell slightly from 25.3 to 24.1 percent.
  • Investment growth in the important real estate sector slowed from 10.2 to 9.9 percent. Land sales continued recovering, but remained negative, down 8.7 percent year-to-date. The slowdown went hand in hand with real estate price growth beginning to fall across the country.

What to watch: The real estate market is cooling, creating the risk of a spillover into the financial system if the slowdown takes place too quickly.

Prices: Consumer prices increase due to rising food prices

  • Core inflation trends downwards despite loose monetary policy
  • Production curbs in the steel industry help recovery of producer prices
  • The effect on pork prices of African Swine Flu continues to push up consumer prices. The Consumer Price Index (CPI) remained elevated but stabilized at 4.5 percent in the last two months of 2019. However, CPI inflation for the full year was well within the government target of 3 percent; it grew 2.9 percent.
  • Core inflation, which excludes more volatile food and fuel prices, slowed to 1.4 percent in December. Price growth would have been even lower without a monetary policy that has released large sums into the economy over the last two years. The PBOC may therefore have room to loosen monetary policy further.
  • Producer prices began recovering in Q4. In December, some recovery was visible as prices contracted by 0.5 percent after having bottomed out at -2.6 percent in October. Climbing producer prices may improve corporate profits.
  • The biggest price increases came from the mining sector, which recorded growth of 2.6 percent in December. Most of this came from the mining of ferrous metals, bound for the steel industry where curbs on production have resulted in prices growing by 8.8 percent.
  • Average house price growth in 70 cities trended downwards for the past two quarters, growing at 7.3 percent year-on-year in December. As a result, prices have now stabilized at roughly 23 percent above 2015 levels (when the latest official price index starts). This may be positive as real estate speculation is one of the biggest concerns for China’s economy.

What to watch: Continued loose monetary policy risks might push up inflation.

Labor market: Government support helps stabilize employment

  • 11 million new urban jobs target easily surpassed
  • Wage growth slows with unskilled workers hit hardest
  • China’s labor market has remained resilient despite slower GDP growth and insecurities caused by US-China trade tensions. In 2019, Beijing rolled out numerous support measures, including training programs and cuts to companies’ social security contributions. These policies seem to have proved effective.
  • In 2019, a total of 13.5 million new urban jobs were created, easily beating the government’s annual target of 11 million. China has now added more than 13 million jobs in seven consecutive years.
  • However, the government remains highly alert to signs of a weakening labor market. In December, the State Council released guidelines extending the fiscal and training support measures for another year.
  • Slower wage growth contributed to keeping employment stable. As a result, disposable income growth was pushed below the level of real GDP growth. By the end of Q4, it grew by 5.8 percent, down from 6.1 percent during the first three quarters.
  • The falling number in minimum wage adjustments in 2019 hurt unskilled workers’ earnings. Only nine provinces raised their minimum wage, whereas 16 did so in 2018. The number of provinces making no adjustments for more than two years rose to nine in 2019 from only two in 2018.
  • It is also becoming evident that the government is failing to reach its target for minimum wage levels, which is reaching 40 percent of average wages. For example, in Beijing, despite annual adjustments the minimum wage was only 31.8 percent of average wages and has been falling since 2014.

What to watch: US-China tensions will prompt global supply chains to accelerate their adjustments in 2020, affecting employment in export-oriented manufacturing.

Retail: Household consumption stabilizes in Q4

  • Retail spending growth slows to 8 percent in 2019, down from 9 percent in 2018
  • Automobile sales contract for third consecutive year despite improvement in Q4
  • Retail spending has been hurt by a bitter cocktail of lower wage growth, higher inflation and greater economic uncertainty. The NBS’s consumer confidence index fell to 122.4 in August (latest available data), its lowest level in 2019. Meanwhile the sub-index on willingness to consume fell by 7 points to 112 in August, its biggest month-on-month drop on record (the data series was launched in 2016).
  • Stronger growth of 8 percent in November and December helped lift retail sales towards the end of the year. Despite slower annual growth, consumer spending has remained resilient in the light of higher consumer inflation and lower wage growth.
  • Volatile automobile sales continued to be affected by a lack of clarity about new policies on emissions standards and e-vehicle subsidies. Stronger auto sales in Q4 helped to improve 2019 growth figures, delivering an annual contraction of 0.8 percent compared to a 2.4 percent fall in 2018. Car sales account for nearly 10 percent of total retail sales, so they have a major impact on overall consumption.
  • Sales of communication devices, mainly smartphones, entered a cyclical slowdown in Q4, after growing more than 20 percent in Q3. However, annual growth was 8 percent and remained above overall retail growth.
  • Online sales growth eased in Q4, though it continued to expand strongly during 2019. Online sales grew by 19.5 percent, and their share in total retail sales had reached 20 percent by the end of 2019.

What to watch: The government could roll out new support measures to increase car sales in order to ensure consumer spending remains stable.