FOLOWUSCONTACT US A CEIC Insights Report China Economy in a Snapshot Q2 2019 2 Executive Sumary Any redistribution of this information is strictly prohibited. Copyright 2019 CEIC, al rights reserved. A CEIC Insights Report China Economy in a Snapshot, Q2 2019 Source: A CEIC Insights Report 3 Economic Outlok Monetaryandfiscalstimulushastranslatedintoimprovedeconomicfundamentals,butthe economystilremainsflat.Fadingfiscalstimulusisatopconcern,asitcoulddragdownfuture economicgrowth. Consumption-drivenpoliciesinthehouseholdappliancesandnewenergyvehiclessegmentsare readytobereleased.Householdconsumptiongrowthwilberesilientandsustainable. Improvedfinancingconditionshavealleviatedthedificultiesfacedbyprivateenterprises,while thepositiveoutlokoftheChina-UStradetalkshasprovidedaboosttomanufacturingactivities andexports. Key Highlights EXECUTIVE SUMARY China Economy in a Snapshot, Q2 2019 TheCEICSmothedLeadingIndicatorfortheChineseeconomywas93.4inApril2019,decliningfor13 monthsinarowfromitspeakof112.3inMarch2018.AftertheslightincreaseinJanuary2019,the unsmothedCEICLeadingIndicatordeclinedto91.3inApril2019,whichwasitslowestlevelsince February2015.EconomicactivityhasbeensteadilylosingmomentumsinceitspeakinFebruary2018. Thesmotheddatafurthersuggeststhattheeconomicturningpointwasmostlikelytheendof2016 andthattheexpansionbetwenQ42017andQ12018wasmoreofatemporaryevent. Theunprecedentedvolumeofcreditandmoneysupplyreflectthegovernmentsstrongdetermination tore-activatetheeconomyandthecapitalmarket.MarchmanufacturingPMIsuggeststheeconomy isatatrough,andtherecentlyreleaseddataforQ12019furtherconfirmsthattheChineseeconomy isataturningpoint.Value-addedindustrialoutputbeatmarketexpectationsbyawidemargin. Recoveryisalsoseeninretailsales,investmentandexports.However,therewassomedata controversy,asdomesticdemandmeasuredbyretailsalesandinvestmentseemedtorecover,yet somehowimportsremainedsubdued.Fixedassetinvestment(FAI)growthaccelerated,butgrowthin privateinvestmentandmanufacturinginvestmentcontinuedtoslowdown,reflectingenterprises cautiouswait-and-seestance.Infact,theaccelerationofFAIgrowthisatributedtothegrowthspurt ininfrastructureinvestmentandrealestateinvestment,whichwasaresultoffiscalandfinancing easing. IntheApril2019editionofitsWorldEconomicOutlokreport,theIMFraisedthe2019GDPgrowth forecastforChinaby0.1pp,butcutthe2020forecastby0.1pp.Inourview,theimprovedeconomic prospectsforthisyeararearesultofexpansionarymonetaryandfiscalpolicies.Marchmanufacturing PMIandtheQ12019economicdataconfirmedthattheeconomyisatatrough.Moneysupplypolicies, includingexpandingisuanceoflocalgovernmentbondsandamasivespikeintotalsocialfinancing, arerevitalisingtheeconomy.However,thisstrongstimulustranslatesintoamere0.1ppincreasein GDPgrowthoutlok,whichclearlyshowstheminimalmarginaleffectofdemand-sidestimulus.The 0.1ppdeclineforthe2020economicoutloksimplyreflectsthefadingfiscalstimulus.Theabove countercyclicalpoliciescanunderpintheeconomicgrowthratherthanpushitup.Weshouldbe cautiousofapotentiallosofgrowthmomentum,oncethefiscalstimuluseffectstartstofadeaway. A CEIC Insights Report 4 Householdconsumptionisoneofthepilarsofsustainableeconomicgrowth.Theeffectsofthe implementedtaxcutswilstarttoshowinthefollowingquartersandconsumption-drivenpoliciesin householdappliancesandnewenergyvehiclesarereadytobereleased.ChinaandtheUSarevery likelytoreachatradeagrement,whichwilhaveahugelybeneficialimpactonChinesimportsand consumption.Inthissense,householdconsumptiongrowthwilremainresilientandsustainable.The procesofrebalancingtheeconomytowardsaconsumption-andservice-drivenonewilaccelerate. Thekeysolutionforsustainablelong-termgrowthisfurtherstructuralreformandopening.The relativelylowdebtratioallowsthecentralgovernmentmoreroomformanoeuvring.Meanwhile, moneysupplyshouldbecontained,andthenewrealestatetaxschemewilbalancethefiscalgap resultingfromtheVATcut.Demographicpolicyandlandpolicyshouldalsoberelaxedtopromote sustainablegrowth.Thedecelerationoflong-termgrowthisinevitable,butthekeyisueistoprevent agrowthslump. Inthefuture,wemightseefourthingshapening. First,eventhoughtheUSandChinacanreachatruceontradedisputes,thefundamentalconflicts betwenthetwocountrieswilpersistinthefuture,astheUSisshiftingfromafriendly engagementtoaChinacontainmentpolicyandisestrangingChinainvariousareas. Second,theplanedincometaxandVATcutswouldbeaccompaniedbytheintroductionofaproperty tax.Asthegrowthoffiscalrevenueswilslowdownalongwitheconomicgrowth,andmorefiscal spendingisneededaspartofcountercyclicaltools,thegovernmenthasstrongmotivationtoincrease thetaxbaseinotherfields. Third,Chinawouldfurtheropenupbyallowingmoreprivatecapitalandforeigncapitaltocomeinto tertiarysectors,andbyimportingmorefinishedgoodsforconsumption. Fourth,Chinaneedstoeasethefinancingconditionsofrealestatedevelopersinordertosmoththe coolingofthemarket. CEIC Leading Indicator Source: CEIC Data EXECUTIVE SUMARY China Economy in a Snapshot, Q2 2019 A CEIC Insights Report 5 InQ12019ChinasrealGDProseby6.4%y/yandreachedoverRMB21.34tninnominalterms.The growthbeatthemarketconsensusof6.3%y/yandremainedflatcomparedtothepreviousquarter. Theprimaryindustry,whichincludessectorssuchasmining,agricultureandforestry,grewby2.7% y/y.Thesecondarysector(manufacturingandconstruction)grewby6.1%y/y,whilethetertiarysector (services)sawthefastestgrowthrateof7%y/y. Ontheproductionside,value-addedindustrialproductionincreasedby6.5%y/y,1.2ppfasterthan JanuaryandFebruary2019together.Thevalue-addedproductionofstate-ownedenterprises(SOEs) increasedby4.5%y/y,thatofshare-holdingenterprisesgrewby7.8%y/y,andthatofforeign enterprisesgrewby1.4%y/y. Onthedemandside,retailsalesroseby8.3%y/yinQ12019,andFAI,excludingruralinvestment,was up5.9%y/y.Exportsgrewby6.7%y/ywhileimportsinchedupby0.3%y/y.Tradesurplusexpandedby 75.2%toRMB529.7bn. Consumerinflationroseby1.8%y/y,farbelowtheanualtargetof3%andproducerpricesgrowth deceleratedto0.2%y/y. Onthelabourmarket,3.24mnworkersgotemployedinQ12019.Unemploymentrateclimbedslowly by0.3ppfromDecember2018toreach5.2%.Butinlightofthesubduedemploymentdemandinthe manufacturingsector,therewilbemoreheadwindsinthelabourmarket. Sumary Purchasing Managers Index EXECUTIVE SUMARY China Economy in a Snapshot, Q2 2019 Source: CEIC Data A CEIC Insights Report 6 China Economy: Statistics at a Glance Source: CEIC Data EXECUTIVE SUMARY China Economy in a Snapshot, Q2 2019 Unit 01.201912.201811.201810.201809.201808.201807.2018 Real GDP: YoY % 6,4 6,5 Industrial Production Index: YoY % 5,7 5,4 5,9 5,8 6,1 6,0 PMI: Manufacturing % 49,5 49,4 50,0 50,2 50,8 51,3 51,2 PMI: Services % 54,7 53,8 53,4 53,9 54,9 54,2 54,0 Consumer Price Index: YoY % 1,7 1,9 2,2 2,5 2,5 2,3 2,1 Producer Price Index: YoY % 0,1 0,9 2,7 3,3 3,6 4,1 4,6 Electricity Generation GWh 619990,0 554300,0 533020,0 548310,0 640490,0 640020,0 Total Imports: YoY: sa % -1,4 -7,6 2,7 15,7 19,1 19,8 22,6 Total Exports: YoY: sa % 9,5 -4,4 5,7 13,4 15,2 10,3 11,3 Unemployment Rate: Registered % 3,8 3,8 Unemployment Rate: Urban Survey % 5,1 4,9 4,8 4,9 4,9 5,0 5,1 Retail Sales: YoY % 8,2 8,1 8,6 9,2 9,0 8,8 Consumer Confidence: YoY % Point 1,4 0,4 0,8 -4,8 -0,1 3,9 5,1 Real Estate Investment: YTD: YoY %CHANGE(Over Year) % 11,6 9,5 9,7 9,7 9,9 10,1 10,2 Fixed Asets Investment: YTD: YoY % 6,1 5,9 5,9 5,7 5,4 5,3 5,5 Foreign Direct Investment USD mn 52654,1 25219,3 Curent Account Balance USD mn 54599,3 23262,9 M2: YoY % 8,4 8,1 8,0 8,0 8,3 8,2 8,5 Policy Rate % pa 2,3 2,3 2,3 2,3 2,3 2,3 2,3 Interbank Treasury Bond Yield: 10 Years % pa 3,1 3,2 3,4 3,5 3,6 3,6 3,5 Non Performing Loans Ratio % 1,8 1,9 A CEIC Insights Report 7 Real GDP Growth Total Credit-to-GDP Radio Retail Sales of Consumer Goods Source: CEIC Data EXECUTIVE SUMARY China Economy in a Snapshot, Q2 2019 8 Real Sector Any redistribution of this information is strictly prohibited. Copyright 2019 CEIC, al rights reserved. A CEIC Insights Report China Economy in a Snapshot, Q2 2019 A CEIC Insights Report Real Sector 9 Inthesecondhalfof2018,theauthoritieswerekeentopromoteshort-termpoliciestostabilisethe slowingeconomy.ThepolicyeasinginJanuary2019hasappeasedmarketsentimentsandis beginingtopropupeconomicfundamentals. Nominalretailsalesgrowthrecoveredto8.7%y/yinMarch2019.Althoughmotorvehiclesalesarestil subdued,theyhavebouncedbackfromnegativeteritory.Retailsalesofhouseholdappliances, furniture,andcosmeticsgrewfasterthaninthepreviousmonths.Aftercomparingretailsalesgrowth atprefecturecitylevel,webelievethatcitieswithlowerhouseholdleverage,particularlyTier-2and belowcities,arethemaindriversofnationalretailsalesgrowth. Growthinindustrialprofits,however,wasstilbotoming.SOEsprofitabilitylevelsremainedstable, asshownbothinofficialdataandinCEICsowncalculations.Thereis,however,roomforscepticism whenweconsiderallothertypesofcompanies.Accordingtotheofficialdatareportedbythe NationalBureauofStatisticsofChina(NBS),shareholdingandprivateenterprisesprofitsmaintained double-digitgrowthratesthroughout2018,whiletheindustrialprofitsofforeignandcolectively- ownedenterprisesremainedinpositiveteritoryforthegreaterpartoftheyear.However,aswetryto smoththebiasofthestatisticalmethodsappliedbytheNBS,wehavebeenobservingsome shockingdivergencesbetwentheofficialyreportedgrowthratesandourownyear-on-year calculationsofthereportednominalvaluessincethebeginingofthelastquarterof2017.Sowhat explainsthediscrepancy?ChinasNBSmethodologycoversbusineseswithanualrevenueabove RMB20mn.However,someentitiesthatareabovethethresholdinoneyearmayfalbelowinthe nextyear.Inordertomakeaconsistentcomparison,NBSlooksatbusinesesthatareinboththis yearsandlastyearsdataset,insteadofapplyingstandardyear-on-yearpercentagechange calculations,whichisthecomonpracticeamongstatisticalagencies.Ifcomonpractice methodologyisapplied,itbecomesevidentthatprofitgrowthofalltypesofenterprises,exceptthe SOEs,hasplungedtonegativeteritoryin2018,indicatinghugelosesastheeconomyhasbeen losingmomentum.Aseconomicfundamentalsimproved,profitgrowthwilralysoonerorlater. Asforrealestatepolicies,therearenolongeranynationwidecontrolpolicies.Instead,eachcitycan introducecity-specificrealestatepolicies.Asaresult,realestateinvestmentwasgrowingbriskly.As ofQ12019,itexpandedby11.8%y/yandacceleratedby0.2ppcomparedtothepreviousquarter.More activehomesalespusheduppropertysales.Leadingindicatorsinthepropertysector,includingnew propertystartsandnewlypurchasedlandarea,improvedaswel.Asforinfrastructureinvestment,it grewatafasterrateof4.4%inQ12019becauseofbeterfinancingconditionsonshore. ThepositiveoutlokontheChina-UStradeagrementsresultedinimprovedperformanceofthe manufacturingsectorandexports.Value-addedindustrialproductiongrewby6.5%y/y,andMarch manufacturingPMIjumpedabove50forthefirsttimeinthremonths.Ontheotherhand,March exportsroseby16.9%y/yand21.3%y/yinUSDandRMBterms,respectively,bothgrowingmuchfaster thanimports. REAL SECTOR China Economy in a Snapshot, Q2 2019 Source: A CEIC Insights Report 10 Contribution to GDP Growth GDP by Expenditure CEIC Data REAL SECTOR China Economy in a Snapshot, Q2 2019 Real GDP Growth Unit 12.201812.201712.201612.201512.2014 Gros Domestic Product: by Expenditure RMB bn88 442,6 81 526,0 74 563,2 69 910,9 64 718,2 Final Consumption Expenditure (FCE) RMB bn48 034,1 43 715,2 39 991,0 36 226,7 32 831,3 FCE: Household RMB bn34 821,0 31 796,4 29 344,3 26 598,0 24 254,0 FCE: Government RMB bn 13 213,1 11 918,8 10 646,7 9 628,6 8 577,3 Gros Capital Formation (GCF) RMB bn39 664,5 36 395,5 32 913,8 31 283,6 30 271,7 GCF: Gros Fixed Capital Formation RMB bn38 077,2 34 936,9 31 808,4 30 150,3 29 005,3 GCF: Changes in Inventories RMB bn1 587,3 1 458,6 1 105,4 1 133,3 1 266,4 Net Export of Gods and Services RMB bn744,1 1 415,4 1 658,5 2 400,7 1 615,2 Source: A CEIC Insights Report 11 GDP by Industry CEIC Data REAL SECTOR China Economy in a Snapshot, Q2 2019 GDP Sector Composition (YTD) Unit 12.201812.201712.201612.201512.201412.2013 Gros Domestic Product RMB bn90 03182 07574 00668 59964 12859 296 Primary Industry RMB bn6 4736 2106 0145 7775 5635 303 Secondary Industry(SI) RMB bn36 60033 27429 65528 20427 75726 196 SI: Industry RMB bn 30 51627 83324 78823 65123 38622 234 SI: Industry: Mining RMB bn 1 8261 9102 3422 547 SI: Construction RMB bn 6 1815 5314 9704 6634 4884 090 SI: Industry: Manufacturing RMB bn26 48224 05121 42920 24219 56218 187 SI: Industry: Electricity, Gas and Water Production and Suply RMB bn 1 5331 4981 4821 500 Tertiary Industry(TI) RMB bn 46 95742 59138 33734 61830 80827 798 TI: Transport, Storage and Post RMB bn 4 0553 7173 3063 0492 8502 604 TI: Information Transmision, Software and Information Technology Service RMB bn 3 2432 6402 1901 8551 5941 373 TI: Wholesale and Retail Trade RMB bn 8 4207 7667 1296 6196 2425 628 TI: Acommodation and Catering Trade RMB bn 1 6021 4691 3361 2151 1161 023 TI: Financial Intermediation RMB bn 6 9106 5406 1125 7874 6674 119 TI: Real Estate RMB bn 5 9855 3974 8194 1703 8003 599 TI: Leasing and Commercial Service RMB bn 2 4432 1891 9481 7111 5281 334 TI: Scientific Research, Polytechnic Service and Geological Prospecting RMB bn 1 4591 3481 2251 101 TI: Water Conservancy, Environment and Utility ManagementRMB bn 425385347306 TI: Resident and Other Service RMB bn 1 4891 2791 085971863 TI: Education RMB bn 2 6772 4252 1161 895 Source: A CEIC Insights Report 12 Retail Sales by Product Dept Burden in Major T1/T2 Cities in China CEIC Data REAL SECTOR China Economy in a Snapshot, Q2 2019 Retail Sales of Consumer Goods 139% 119% 91% 80%80% 78% 74% 0% 20% 40% 60% 80% 100% 120% 140% 160% Sh e n z h e n Xi a m e n Be i j i n g Ha n g z h o u Ti a n j i n Sh a n g h a i Ha i k o u Gu a n g z h o u He f e i Sh i j i a z h u a n g Ta i y u a n Na n j i n g Wu h a n Fu z h o u Ni n g b o Da l i a n Zh e n g z h o u Wu x i Ha r b i n Ch e n g d u La nz hou Na n c h a n g Qi n g d a o Xi a n Ji n a n Ku n m i n g Ch a n g c h u n Ch o n g q i n g Gu i y a n g Xi n i n g Sh e n y a n g Ur u m q i Ch a n g s h a Yi n c h u a n Ho h o t Monthly Mortgage/Household DisposableIncome Source: A CEIC Insights Report 13 Industrial Production Growth Industrial Profit Growth: State-Owned Enterprises (YTD) CEIC Data REAL SECTOR China Economy in a Snapshot, Q2 2019 Manufacturing PMI: Relative to Breakeven Level of 50 Source: A CEIC Insights Report 14 Industrial Profit Growth: Foreign Enterprises (YTD) Industrial Profit Growth: Colectively-owned Enterprises (YTD) Industrial Profit Growth: Private Enterprises (YTD) Industrial Profit Growth: Shareholding Enterprises (YTD) CEIC Data REAL SECTOR China Economy in a Snapshot, Q2 2019 Source: A CEIC Insights Report 15 Flor Space Started and Flor Space Sold (YTD) CEIC Data REAL SECTOR China Economy in a Snapshot, Q2 2019 Total Social Financing Growth (Outstanding Amounts) *In Sep 2018 the PBoCadjusted for a second time its definition of aggregate financing by including net financing through local government special bond isuance -just two months after it aded aset-backed securities. Source: A CEIC Insights Report 16 Residential Property Price Growth in 70 Cities Fixed Aset & Infr