The outlook remains stable. Available economic indicators show growth momentum remains weak. Industrial production was subdued in ...

Economic Outlook For China, People's Republic of China (January 2020)

The outlook remains stable.
Available economic indicators show growth momentum remains weak. Industrial production was subdued in October, as the trade war with the U.S eroded manufacturing activities. This trend is expected to continue in the coming months as corroborated by a new drop in exports in November. Moreover, mounting economic uncertainty is postponing investment plans, especially among foreign firms. The main silver lining has been the rebound in the manufacturing PMI in November. Meanwhile, on 13 December, President Trump agreed to a limited trade deal with China, effectively barring a fresh round of tariffs due on 15 December. As part of the deal, U.S. officials stated that China will purchase more U.S. agricultural products, while the U.S. will remove some existing tariffs in return. At the time of writing, however, Chinese authorities have not yet confirmed whether the two sides have reached an agreement.

Next year, the economy will continue to moderate amid a long-lasting trade rift with the United States. Moreover, the property sector is expected to suffer from tight financing, which will weigh on overall economic growth. Although supportive fiscal and monetary policies are expected to cushion the slowdown, the scale of the measures will be limited. FocusEconomics panelists see the economy growing 5.9% in 2020, which is unchanged from last month’s forecast, before decelerating to 5.7% in 2021. Inflation soared from October’s 3.8% to 4.5% in November, a near eight-year high. The African swine fever outbreak continues to push up prices not only for pork but also for substitute products such as beef and lamb. Conversely, non-food inflation remains subdued, reflecting weak economic growth. Looking forward, inflation will inch down on this year’s high base effect. FocusEconomics panelists forecast that inflation will average 2.7% in 2020, which is up 0.2 percentage points from last month’s estimate, and 2.3% in 2021.

On 18 November, the Central Bank slashed its seven-day reserve repo rate by 5 basis points (bp) to 2.50%, while, on 20 November, the Bank cut the one-year loan prime rate by 5 bp to 4.15%. These actions followed a similar move with the medium-term lending facility on 5 November, and should lower borrowing costs especially for small-to-medium-sized firms. Panelists project the one-year deposit and lending rates to close 2020 at 1.48% and 4.33%, respectively, and 2021 at 1.50% and 4.35%.

Lack of tangible progress on a potential trade deal between China and the United States weighed on the yuan in recent weeks. On 11 December, the yuan traded at 7.04 CNY per USD, a marginal 0.4% month-on-month depreciation. President Trump’s erratic foreign trade policies and a challenging domestic economy will determine the evolution of the yuan further down the road. Our panelists see the yuan ending 2020 at 7.12 CNY per USD and 2021 at 7.07 CNY per USD.

PMI & Beyond
The manufacturing Purchasing Managers’ Index (PMI) published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) rose from 49.3% in October to November’s 50.2%. The print was above the 49.5% result expected by market analysts. As a result, the index sits above the 50.0% threshold that separates contraction from expansion in the manufacturing sector for the first time in seven months. November’s improvement reflected a sharp turnaround in new orders, along with stronger growth in the production index. While robust demand boosted suppliers’ delivery times and purchasing activity, job creation was unchanged. Despite remaining well below the 50.0% threshold, export orders gained some ground in November, likely reflecting hopes of a trade agreement between China and the United States. Input prices—a reliable leading indicator for inflation—receded further in the same month. Against this backdrop, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, comment that: “The blip of a rise in the official manufacturing PMI certainly looks positive for markets, but we do not think such a rebound suggests a bottoming out of the economy, as strong growth headwinds remain, especially from the cooling property sector and China’s worsening fiscal situation. […] We do not think Beijing will overreact to this reading, as it has already learned the lessons from spring this year when some headline data pointed to a recovery. Amid a deteriorating growth outlook, Beijing will likely to roll out more easing measures despite limited policy room.” Panelists expect GDP to expand 5.9% in 2020, which is unchanged from last month’s estimate. In 2021, the panel foresees lower economic growth of 5.7%.

Industrial Production
Industrial production increased 4.7% year-on-year in October, sharply down from September’s 5.8% expansion and undershooting analysts’ expectations of a 5.4% rise. The reading was led by sizeable decelerations in mining and manufacturing output. The energy sector, however, posted an acceleration in the same month. On a month-on-month seasonally-adjusted terms basis, industrial production increased 0.17% in October, down from the 0.71% expansion in September. Annual average growth in industrial production, meanwhile, inched down from 5.7% in September to 5.6% in October. Against this backdrop, Iris Pang, Greater China economist at ING, comments that: “Industrial production of vehicles (-11.1%YoY) and smartphones (-7.3%YoY) show how the trade war has affected exports as well as local demand. Vehicles and smartphones share two similar features; they are both expensive and demand for new models from consumers is low without an obvious reason to upgrade. As demand is weak, production shrinks as inventory must be sold. It’s not all bad though. Production of integrated circuits grew 23.5%YoY in October and we expect this to remain strong due to the production of 5G parts and products.”

Investment Growth Falls To Record Low
Nominal urban fixed asset investment expanded 5.2% year-to-date in October, below the 5.4% increase in January–September. The reading undershot market expectations of a 5.4% rise and represented the lowest print since the data started in 1998. The reading reflected a slowdown in growth in the tertiary sector as well as a sharper decline in the primary sector. The secondary sector, however, posted an acceleration in the same period. Meanwhile, property investment growth slowed slightly to 10.3%, the lowest rate since the start of the year. In terms of ownership, investment growth in fixed assets of state-owned enterprises accelerated in January-October, while the expansion in investment among private companies softened to a nearly three-year low in the same period. On a month-on-month basis, investment in urban fixed assets rose a seasonally-adjusted 0.40% in October, marginally down from the 0.42% expansion in September. Yi David Wang, head of China economics at Credit Suisse, noted that: “Looking ahead, domestic demand indicators will likely remain tame over the next couple of months. However, we maintain the view that an inflection point to underlying growth momentum will likely occur by December/January in light of our outlook for more supportive policies to come in 2020.”

Exports Contract For Fourth Consecutive Month
In November, exports fell 1.1% over the same month last year, coming in below the 0.8% drop in October. Moreover, the print marked the fourth contraction in a row and contrasted the 0.8% rise that market analysts had expected. Meanwhile, imports rose 0.3% in annual terms in November, contrasting the 6.2% contraction in October and marking the first positive reading in seven months. Moreover, the print was above the 1.4% decline that market analysts had projected. As a result of the expansion in imports, the trade surplus fell to USD 38.7 billion in November 2019 from USD 41.9 billion in November 2018 (October 2019: USD 42.5 billion surplus). The 12-month moving sum of the trade surplus fell to USD 434 billion from USD 438 billion in October. Our panelists forecast that exports will expand 1.5% in 2020 and imports will rise 2.6%, bringing the trade surplus to USD 393 billion. In 2021, FocusEconomics panelists expect exports will expand 2.9%, while imports will rise 3.7%, leaving the trade surplus at USD 388 billion.

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