China Economic Quarterly Q3 2017
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1 November 2017 Major economic indicators p1 /Policy updates p10 /Hot topic analysis p13 China Economic Quarterly Q Overall 2017 economy likely to outperform market expectations, despite moderately slower growth in third quarter
2 Content I. Major economic indicators 1 II. Policy updates The 19 th Party Congress Encouraging entrepreneurship in China III. Hot topic analysis How Fintech is Shaping China s Financial Services A Chinese perspective on rising commodity prices
3 GDP (Trillions of RMB) I Major economic indicators Quarterly GDP values and quarterly and annual GDP growth rate % 6.90% 6.70% 8.00% 7.00% % % 4.00% 3.00% % 1.80% 1.70% 1.50% 1.90% 1.70% 1.70% 1.70% 1.80% 2.00% 1.80% 1.80% 1.70% 1.30% 1.30% 2.00% 1.00% 0.00% Quarterly GDP value Quarterly growth Annual GDP growth China s GDP growth for the third quarter has slowed down to 6.8%, 0.1 percentage points less than the previous two quarters of the year. Thanks to the strong contribution from the service sectors, total GDP for the first three quarters together increased to trillion yuan with 6.9% growth rate. As a result, we expect that the economic growth rate in 2017 would demonstrate a better performance than that of 2016, and beat the market expectation of 6.7%, as forecasted by the International Monetary Fund (IMF) 6.8% for 2017 and 6.5% for In spite of the gentler growth during the third quarter, China has contributed 34.6% in growth to the world economy in 2017, according to IMF. Meanwhile, it is worth noting that the World Bank also upgraded its forecast for the Chinese economy for this year and the next. China s strong growth resonates well with the new trend of economic rebound of major emerging markets (BRICS), which all grew for the first time in three years, thanks to their favourable government policies and a rise in gains for energy and metal commodities in PwC 1
4 12.01% 11.29% 11.21% 11.25% 10.96% 10.85% 10.67% 10.24% 9.75% 9.09% 47.12% 45.90% 46.04% 46.17% 44.91% 43.65% 42.86% 40.56% 39.66% 40.19% Percentage 40.87% 42.81% 42.75% 42.59% 44.13% 45.49% 46.47% 49.21% 50.60% 50.73% For the first three quarters, the output of primary, secondary and tertiary industry was 4.12, 23.81, and trillion yuan respectively. The tertiary industry or services, accounting for 52.9% of total GDP, grew by 7.8% yearon-year, which was the highest growth rate relative to other segments. More specifically for the secondary industry, manufacturing and utilities (electricity, water, gas supply and etc.) went up by 7.3% and 8.4%, respectively, during the last three quarters in These sectors performed much better than mining, which continued to have a negative growth. GDP composition % 80.00% 60.00% 40.00% 20.00% 0.00% primary secondary services 2 China Economic Quarterly Q3 2017
5 Percentage Fixed Asset Investment: Accumulated Growth 13.50% 11.40% 10.30% 10.00% 10.70% 9.00% 8.20% 8.10% 9.20% 8.60% 7.50% Total fixed asset investment reached trillion yuan and expanded 7.5% year-on-year in the first three quarters. The overall growth has declined by 0.7% compared to the same period last year. State sector investment rose by 11% year-on-year while private investment, accounting for 60.5% of total investment, remained low, increasing by only 6% year-on-year, relatively better than 3.2% in How to provide a better business environment and encourage more private investment remains a big challenge for the Chinese economy. From January to September, industrial investment went up merely by 3.3% year-on-year to trillion yuan, of which manufacturing investment increased by 4.2% to trillion yuan. On the other hand, fixed asset investment in service sectors, accounting for 59% (27.18 trillion yuan) of the total investment, rose by 10.5% year-on-year, while infrastructure investment went up by 19.8% to 9.97 trillion yuan during the first nine months of High-tech manufacturing, equipment manufacturing and technological upgrading recorded high growth, while investment into high energy-intensive industries fell by 1.9% from last year. PwC 3
6 Growth rates in real estate 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% 2.0% 1.3% 2.2% 2.6% 1.3% 1.0% 11.5%11.4% 11.2% 12.2% 9.9% 11.1% 8.9% 10.1% 9.3% 8.8% 9.7% 8.1% 9.0% 3.0% 7.0% 9.1% 8.1% 8.8% 8.5% 7.9% 7.9% 8.0% 6.2% 7.2% 7.0% 6.9% 6.1% 6.2% 5.3% 5.4% 5.8% 6.6% 6.5% 5.7% 5.3% -1.0% 14.7% 16.8%16.8% 15.6%15.3%14.8% 15.5%15.5% 15.0%15.2% -11.7% -6.5% -5.9% -3.0% -4.3% -3.4% -6.1% -5.5% -7.8% -8.5% -20.0% -19.4% -25.0% -30.0% -35.0% -40.0% -31.7% -33.8% -33.1% Growth rate of land purchased Growth rate of resources of funds Growth rate of investment The overall real estate market in the first three quarters remained stable, with investment growing by 8.1% year-on-year to 8.06 trillion yuan, 2.3% higher than a year ago. Investment in residential building, accounting for 68.3% of total real estate investment, stood at 5.5 trillion yuan, up by 10.4% from last year. In September, floor space sold and sales volume of the commercial buildings went up by 10.3% and 14.6%, and residential housing sales rose by 11.4% from last year. As the national and local governments are stepping up their restrictive policies to further curb the speculation, property sales might decrease in the fourth quarter and the next year. In terms of sources of funds, there were funds worth trillion yuan available from January to September, of which domestic loans account for 17%, growing by 19.5%; self-financing constitutes 32.3% (3.65 trillion) of all funds, declining by 0.3%; other funds including deposit and advance payment, personal mortgage loans (5.75 trillion yuan,) account for 51%, growing by 10.4%. As regulation and control over real estate keeps getting tighter, sources of funds might become a challenge for many developers in the fourth quarter and the year Growth rate of land purchased reached 12.2% in the first three quarters, with space of land purchased stood at 1.67 trillion square metres. 4 China Economic Quarterly Q3 2017
7 Percentage Purchasing Managers Index 56.0% 54.4% 54.5% 55.1% 54.9% 55.4% 54.0% 53.8% 53.4% 53.8% 53.7% 53.7% 52.4% 52.0% 51.4% 51.8% 51.7% 50.0% 50.2% 49.8% 49.7% 50.2% 50.0% 50.4% 48.0% 46.0% Non-manufacturing Manufacturing 50% breaking point China s Purchasing Managers Index (PMI) for manufacturing sector in the past three months has become even stronger, with September hitting a new high of 52.4% since May Production index and new order index stood at 54.7% and 54.8% respectively, both at high levels in recent years. A strong manufacturing PMI indicates steady growth and prospects for the sector. Thanks to the global economic upturn and positive outlook of China s economy, manufacturing sector is likely to keep expanding in Non-manufacturing PMI remained at high level, with business activity index reaching 55.4% in September, the highest level since June With manufacturing production gathering pace, production related services experienced rapid growth, with business activity index reaching 59.7% in September, 5.1% higher than last month. PMI of wholesale, telecommunication, internet, software and IT, financial services, insurance, capital market services surged to high level of over 60% in September. Construction industry returned to booming period, with business activity index reaching 61.1% in September, 3.1% higher than in August. PwC 5
8 Percentage Growth of Industrial Added Values (for companies over certain scales) 7.60% 7.60% 6.80% 6.80% 6.60% 5.70% 5.90% 6.20% 6.10% 6.00% The growth of Industrial Added Values (for companies over certain scales) went up by 6.7% year-on-year in the first three quarters, 0.7% higher than the same period last year. By sectors, manufacturing went up by 7.3% year-on-year, utilities sector went up by 8.4%, and mining sector fell by 1.6% year-on-year. Furthermore, industrial added values of manufacturing of equipment, computer, telecom and automobile grew by over 10% in September. In the first three quarters, profits of industrial enterprises over certain scales rose by 22.8% compared to same period last year. The mining sector led the growth in profits, jumping by 4.7 times year-on-year, profits for manufacturing grew by 19.6% year-onyear, while profits for power, heat, gas and water declined by 18.3% over the same period last year. We expect the growth of industrial added values to stay bullish in China Economic Quarterly Q3 2017
9 Percentage Retail Sales of Consumer Goods: Accumulated Growth Rate 10.70% 10.56% 10.50% 10.41% 10.40% 10.40% 10.40% 10.40% 10.30% 10.30% 10.00% Total retail sales of consumer goods reached trillion yuan and went up by 10.4% in the first three quarters. Consumption continued to be the largest driver of economic growth, contributing to 64.5% to China s GDP in the first three quarters of Catering consumption (2.84 trillion yuan) grew by 11% year-on-year from January to September, while the goods consumption (23.48 trillion yuan) went up by 10.3% year-on-year. Among goods consumption, sale of sports and recreational articles increased by 17.4%, cosmetics up by 12.1% and construction and decoration materials grew by 12.6%. In addition, China s online sales reached 4.88 trillion yuan in the first three quarters, 34.2% higher than the same period last year. Among them, sales of material goods, accounting for 14% of total retail sales, stood at 3.68 trillion yuan, up by 29.1%, while sales of nonmaterial goods reached 1.2 trillion yuan, increasing by 52.8% year-on-year. PwC 7
10 Growth Quarterly Balance of Trade % -1.50% % -8.62% -1.17% 8.99% 20.83% 3.36% 8.64% -2.31% -1.59% 1.25% 0.80% 12.46% 35.00% 30.00% 25.00% 20.00% 15.00% % 0.95% % % -7.89% 1.95% 30.27% 16.43% -6.05% 12.71% 4.90% -5.44% -4.26% 0.34% 10.47% 7.66% (Billion) 1,200 1,100 1, % 5.00% 0.00% -5.00% % % % % Net Export (RMB billion) Export Growth Import Growth Thanks to the moderate recovery of global economy and fairly strong domestic demand, China s imports and exports had the best performance among all major economic indicators. The total trade value registered at trillion yuan in the first nine months, up by 16.6% year-on-year. Among them, exports went up by 12.4% year-on-year to 11.2 trillion yuan, and imports grew by 22.3% year-on-year to 9.13 trillion yuan, with a trade surplus of 2.03 trillion yuan. Machinery products continued to dominate China s exports (accounting for 57.5%), growing by 13% year-on-year in the first three quarters. Hiking commodity prices was a key reason for the rising total trade values. For instance, during the first three quarters, import prices of iron ore, crude oil, copper and coal went up by 38.4%, 33%, 29.2%, and 75.4% respectively. The rise in commodity prices increased import value by more than 10% and contributed 52.5% to imports growth. For the fourth quarter of this year and 2018, we expect trade would continue to grow at a higher pace than overall GDP, as the global market improves further. 8 China Economic Quarterly Q3 2017
11 Growth (contraction) rate Producer Price Index and Consumer Price Index 8.00% 7.60% 6.90% 6.00% 5.50% 5.50% 4.00% 2.00% 1.38% 1.39% 1.60% 1.60% 2.30% 1.88% 1.92% 2.08% 0.90% 1.50% 1.60% 0.00% 0.10% -2.00% -2.60% -4.00% -4.56% -4.81% -4.30% -5.95% -5.90% -6.00% -8.00% CPI PPI Producer Price Index (PPI) went up by 5.5%, 6.3% and 6.9% year-on-year respectively in July, August and September, maintaining a high level of 6.5% since the beginning of the year. The primary driver was rising producer prices for production goods, which increased by 7.3%, 8.3% and 9.1% yearon-year respectively in July, August and September. On the other hand, producer price for consumer goods only rose by 0.5%, 0.6% and 0.7% in the same period. Furthermore, mining and raw materials prices went up by 17.2% and 11.9% respectively, triggered by rising commodity prices. PPI for the rest of 2017 and 2018 is expected to continue to increase if commodity prices grow again. Compared to high level of PPI, growth in consumer price index (CPI) has been fairly moderate. CPI increased by only 1.6% year-on-year in September and averaged 1.5% for the first nine months in Due to strong supply, food prices declined by 1.4% in September while the prices of services went up by 3.3%. Price of healthcare increased at an average of 5.7% during the first nine months, making it the highest among all major items. Education, culture and recreation, and residential housing came in next with an average growth rate of 2.5%. We expect CPI to remain stable in 2018 and price of healthcare might decrease to a lower level as government releases more supporting policies on reducing the medical cost of patients. PwC 9
12 II Policy Updates The 19 th Party Congress The 19 th National Congress of the ruling Communist Party of China (CPC) held in Beijing from October 18-24, 2017, has made some very important decisions. It elected a new central leadership headed by General Secretary Xi Jinping, adopted a new theory the Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, and set a long-term vision on China s future development. The meeting claims that the principal contradiction in today s Chinese society has evolved to the contradiction between unbalanced and inadequate development and the people s evergrowing needs for a better life. The near-term target is to build China into a moderately prosperous society and eradicate poverty in rural areas by 2020, as stipulated in the 13th Five-Year Plan. The Party has adopted a two-step approach for China s long-term growth the first step is to basically realise socialist modernisation from 2020 to 2035, and the second step is to work for another 15 years to build China into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful by the middle of the 21 st century. The five guiding principles innovation, coordination, greenness, openness and inclusiveness as enshrined in the 13th Five-Year Plan will be adhered to during the development process. Fourteen fundamental principles were laid out as the foundation of developing China s roadmap and action plans for future reform and progress in the next 30 years. On economic policy, the Party decided to pursue supply-side structural reform as the main task and work harder for better quality, higher efficiency and more robust drivers of economic growth through reform. It also called for new industrialisation, IT application, urbanisation, and agricultural modernisation to go hand in hand. In the next three years, priorities will be given to forestall and defuse major risks, especially financial risks; carry out targeted poverty reduction; and prevent and control pollution so to ensure that the goal of building a moderately prosperous society will be achieved by China Economic Quarterly Q3 2017
13 Key observations of the congress include: 1. The Party will assume absolute leadership over work in all areas of endeavour in every part of the country, and advocates centralised and unified leadership within the Party with General Secretary Xi Jinping as the core ; 2. The Party has moved to put more emphasis on quality and efficiency of future economic development and purposely set no quantitative targets for GDP growth; 3. SOEs, with strong Party and state support, will play a more prominent role in China s future economic drive, while SOE reform will gather pace; 4. Foreign companies and the private sector are expected to enjoy improved market access and fairer treatment as the Party vows to provide a favourable business environment for all types of business entities; 5. The Belt and Road Initiative, representing a China-driven new model of international economic cooperation, is poised to gather new growth momentum; 6. Other than economic growth, the Party has devoted more attention to environmental protection and improving people s livelihood. This more balanced and inclusive approach will not only make China s growth more sustainable, but also open up much more business opportunities to foreign and domestic companies. (Please visit for details of a PwC commentary on the business implications of the congress) PwC 11
14 Encouraging entrepreneurship in China On September 25, 2017, the Communist Party of China Central Committee and the State Council jointly issued a guideline on encouraging entrepreneurial spirit and creating a favourable environment for entrepreneurship. The guideline states that the Government will protect the legal rights and interests of entrepreneurs, strengthen protection of intellectual property rights (IPR), fight against monopolies, unfair competition practices and regional protectionism, and remove regulations that undermine fair competition. The Government will also introduce a negative list management programme nationwide to ensure fair access to industries and businesses that are not off-limits to market entities. According to the guideline, the entrepreneurial spirit refers to hard work, pursuing excellence, craftsmanship, innovation and serving society all important features for promoting an innovation-driven economic transformation. The Government promised to introduce more reform measures to create a better environment for innovation and development in the future. The guideline was introduced at a time when private investment, accounting for over 60% of China s total investment, remains weak and many wealthy businesspeople are trying to move their wealth to foreign countries. In the first three quarters this year, fixed investment from the state sector rose by 11% yearon-year, while private investment grew by only 6%, slightly better than the annual rate of 3.2% in The release of the guideline represents that the Chinese government has recognised the value of entrepreneurs and is wishing to improve business environment to restore business confidence. A lot more detailed work, however, will be needed at ground level before entrepreneurs can be certain about their benefits and legal rights of making investment. 12 China Economic Quarterly Q3 2017
15 III Hot topic analysis How Fintech is Shaping China s Financial Services With the new round of technological and industrial revolutions progressing in the world, new information technologies such as cloud computing, data & analytics, artificial intelligence and blockchain have made great strides and set off a wave of financial technology (fintech) sweeping the globe. How is fintech shaping China s financial services sector? I. China s Fintech Market We see three dimensions of fintech in China, which are services and sales via internet channels; business model and service innovations based on technologies; and most importantly, financial institutions operational improvements using internet technologies. The proportion of fintech involvement will continue to increase throughout the entire transformation process of the financial services. Data and analytics is becoming the foundation of effective business decision making. More and more business model innovations are expected based on technology breakthroughs and new thinking. The Fintech journey in China is expected to go through three stages, in our view: stage 1.0 was the scenario-based financial services revolution; the current stage 2.0 is the technology-driven revolution; and stage 3 is likely to be the business model revolution. At stage 1.0, financial products and services have been created from different scenarios, and the main driving forces are internet companies. At stage 2.0, emerging technologies are used to change channels, products and operations of financial institutions, strengthen the financial supplies and connect closely with demand. The main driving forces are traditional financial institutions and internet companies. At stage 3.0, the financial services business model will be rebuilt, where on-demand financial services will eventually take place (i.e. Inclusive Finance). In 2016, fintech remained the focus of venture capitals and investment funds in China. The scale of investment and financing increased by 182% year-onyear as shown below 1. FinTech investment momentum, 2015 vs 2016 Investment amount (in RMB billion) Source: Institute of Internet Finance, Shanghai Jiao Tong University, Beijing Capital Investment Research Report on China's Internet Financial Investment and Financing in 2016 PwC 13
16 China is likely the largest Fintech market in the world in terms of volume and transactions, with online (mobile) payment, transaction volume reaching 100 trillion yuan in Online consumer financing and marketplace lending (P2P) business has grown significantly, although regulations will become more stringent. Many unique features such as the online payment system, mobile active level, urbanisation, education, etc. will help support China's Fintech business, and stimulate other Fintech related business models to boom in China. In terms of truly innovative and revolutionary technology, however, China is still behind the US. In 2017, four Chinese Fintech companies (all in online lending business) got listed in NYSE and one listed in Nasdaq. In addition, an insurtech company and an online auto financing company got listed in HKSE in Global capital market understands China Fintech much better now than anytime in the past. PwC was involved in five of the seven recent IPOs. For Chinese financial institutions, the focus of attention on fintech is mainly in the following areas, according to a PwC survey: Strategies and mindset: Strengthen innovation through internal efforts and partnerships with fintech companies in the next three to five years; Resource allocation: Commit to investing in emerging technologies and intend to allocate nearly a third of annual turnover to fintech investments. Action plan: Plan to increase partnership with fintech companies, but concerns around IT security, regulatory uncertainty and IT compatibility need to be addressed. II. The impact of fintech From PwC s perspective, fintech will impact the financial services sector in five aspects: 1. Fintech companies tend to snatch away the revenues of traditional financial institutions and force them to be more competitive and vibrant; 2. Technology disrupts the logic of traditional financial institutions and empowers them to adjust their strategic direction; 3. Electronic channel services occupy the entrance, driving traditional financial institutions to achieve full channel integration and coordination; 4. Innovations in fintech companies have sprung up, inspiring traditional financial institutions to innovate their business models; 5. Business innovation drives management innovation, forcing traditional financial institutions to reform their organisational model and IT architecture. III. Typical applications of ABCD (AI, Blockchain, Cloud Computing, Data & Analytics) in financial services The rapid development of technology has brought tremendous changes in the traditional financial service model from both demand and supply ends. We have our fintech jigsaw shown in the chart below and we ll explain them one by one from market situation and application scenarios perspective in China. Improve service efficiency Lead the new business landscape Promote the systematic development of business A Artificial intelligence B Blockchain Develop technical agreements and industry standards Reduce operating costs Enhance customer loyalty Improve customer experience C Cloud Computing D Big Data Explore new financial models IoT UAV 14 China Economic Quarterly Q3 2017
17 A Artificial Intelligence The AI market in China is developing rapidly. China s 2020 AI market is expected to grow from 1.2 billion RMB in 2015 to 9.1 billion RMB. In 2015, nearly 1.4 billion RMB (up 76% year-on-year) funds flowed into the AI market 2. In terms of government policies, China s National Development and Reform Commission released a three-year implementation plan including Internet Plus and Artificial Intelligence in May The plan identified the support to AI development in six specific areas: funding, system standardisation, intellectual property protection, human resources development, international cooperation and implementation arrangements 3. AI is a hot topic in China, but compared to developed countries, there re still a lot to catch up with basic theory, chip, system, ecology, hardware, software and project layout. In China, AI s application scenarios in financial industry has four aspects: 1. Speech recognition and natural language processing applications, such as smart customer service and voice data mining; 2. Service robotics applications, such as room inspection and intelligence robot; 3. Machine learning, neural network application and knowledge map, such as customer persona, anti-fraud, intelligent risk control and robo-advisor; 4. Computer vision and biometrics applications, such as portrait surveillance warning, employee irregularities monitoring and core area security monitoring. B Blockchain In China, most of the Blockchain entrepreneurial projects are in early stage and before A round of financing. As shown in the chart below, digital currency, corporate services and finance are top three applications of blockchain in China in 2015 and beyond. In the blockchain area, Chinese are more inclined to do business application startup other than the underlying technology platform. To standardise the digital currency market, China announced a ban on Initial coin offerings (ICOs) funding in early September Chinese regulators established a Central Bank Digital Currency Institute in 2016, with the goal of issuing a legal digital currency based on national credit in the future. China blockchain project set up number Financial Digital currency Corporate Services Others Source: 36 Kr Research Institute Fintech Industry Research Report 2017 There are several scenarios for blockchain in China, such as customer credit investigation, syndicated loan, money management, bill payment platform and medical insurance. There is still a long way ahead before a mature solution on the market. 2. Source: AI, Machine Learning and Data Fuel the Future of Productivity, Goldman Sachs Research 3. Source: AI, Machine Learning and Data Fuel the Future of Productivity, Goldman Sachs Research PwC 15
18 C Cloud Computing At present, China s financial cloud market is at an initial stage of development with low market penetration, but is growing fast. Meanwhile, domestic policies encourage the financial sector to fully tap the financial cloud market, therefore big potential can be expected. Forecast and Penetration Rate of China s Financial Cloud Market * Forecast (100 million yuan) % % 160% % % 100% % % 38% 57% 73% 80% 60% 40% 20% E 2019E 2020e 0% Market size penetration Note: * Permeability refers to the proportion of institutions with cloud applications; * * The average growth of cloud services market in is 32% Despite the favourable policies, there are four major challenges for China s financial institutions cloudification: cloud migration and other capabilities are not enough; high requirements of safety and risk control; low degree of automation; no positive effect after cloudification makes it difficult to promote. There are a large number of common modules that can be used directly for financial sectors, while some can be customised according to sub-sectors, such as retail platform, institutional platform, SME platform for banks, underwriting and claim systems for insurers, information and investment systems for trust, fund and securities. 4. Source: 2016 China Cloud Computing White Paper China ICT Research Institute, Medical Cloud Application Trends Research Report, iresearch Cloud Services Report, IDC Report, China Banking Regulatory Commission, People s Bank of China, PwC Analysis 16 China Economic Quarterly Q3 2017
19 D Data & Analytics Data, which is rapidly expanding and growing, can be a great accelerator to future development of enterprises as it can help enterprises better understand the market and realise the optimal allocation of resources. China big data market size forecast E 2016E 2017E 2018E Revenue scale (100M RMB) Source: China big data industry market operation trend and development prospect report, Zhiyan Consulting Group In China, policy benefits, large amount of accumulated data and huge analytical demands will jointly promote the rapid development of the industry. However, a lot still needs to be done because of the gap of data quality, data processing and analysis expertise. China s financial sector features the following big data applications: large deposit marketing; credit risk control; intelligent enterprise risk control; managing the marketing opportunities; precise marketing; public opinion analysis; big data governance, and so on. IV. Recommendations Looking forward, we would like to suggest Chinese financial institutions to take the following actions on fintech innovation to reap the full benefits brought by fintech: Develop a fintech driven top-level design and incorporate it into long-term development strategies; Establish independent fintech innovation system and explore new mode of financial services; Explore emerging technologies implementation roadmap, launch pilots on digitising and transformation of existing business processes; and Focus on technology-driven capacity-building, effectively promote deep integration of finance and technology. (For inquiries or questions, please contact James Chang, Leader of Financial Services, Consulting, PwC China at james.chang@cn.pwc.com and Vivian Ma, Partner of Financial Services, Assurance, PwC China at Vivian.ma@cn.pwc.com) PwC 17
20 A Chinese perspective on rising commodity prices During the first three quarters, rising commodity prices pushed up the value of China s imports by more than 10% and contributed 52.5% to imports growth. As total imports were valued at 9.13 trillion yuan, a 10% price hike means 913 billion yuan or roughly US$138 billion. This is not a small amount for international commodity market, and it has brought dramatic impact on China s economy. Going forward, however, continued increase in commodity prices might not be sustainable because of the change in China s economic growth model. Based on 2015 data, China s demand accounts for over 50% of global iron ore, alumina, nickel and thermal coal demand, and over 40% of global zinc, copper, lead, zinc, steel and coking coal demand, and more than 10% of global crude oil demand. During the past decade and more, China was by far the largest consumer of global commodities. Thus, China s economic growth and its demand for raw materials have significant impact on the demand and supply situation as well as prices of the global commodity markets. In addition, there are a few other factors at play that contributed to pushing up the commodity prices. Firstly, the global economy experienced a better-thanexpected recovery, triggering both IMF and the World Bank to raise their forecast for global GDP in 2017 and Secondly, the Chinese economy also registered better performance than market expectations, meaning stronger demand for commodities. Meanwhile, further progressing of China s on-going supply side structural reform has resulted in reduced production and supply of steel, coal and etc. and this has led to rising prices and rising imports from abroad. China Commodity Price Index: General Index ( ) Source: Wind 18 China Economic Quarterly Q3 2017
21 Over the past decade, while many major economies were in recession, China has contributed more than 30% to global economic growth, according to IMF. In the meantime, Chinese consumption was a major driver for the booming of international commodity markets, particularly for base metals. As President Xi described in his report delivered to the 19th National Congress of the Communist Party of China (CPC) in October, China s economy has been transitioning from a phase of rapid growth to a stage of high-quality development. It means that there will be significant changes to the old growth model, and quality will exceed quantity as the new priority for growth. Take the housing and manufacturing sectors, the two key consumers of commodities over the past decades. As the workshop of the world, growth of China s traditional manufacturing capacity has slowed down, as the country has shifted its focus to developing advanced manufacturing, exemplified by the Made in China 2025 initiative, in its bid to become a global manufacturing power. Consequently, growth in demand of commodities from Chinese manufacturing industry is likely to fall to a lower level in the future. On housing, President Xi reiterated in his speech at the 19th Party Congress that Housing should be for living in, not for speculation. The governments at central and local levels have promulgated new policies to constrain new investment into the housing market, curb market speculations and reduce housing prices. As a result of these new policies, we expect the real estate market to cool down. Consequently, a gentler Chinese real estate market would certainly consume less commodities, and this will bring a negative effect on international commodity prices. As we pointed out earlier, China s demand accounts for a large proportion of the price hikes for base metals. New growth model and weaker demand from China for commodities will have a direct impact on the prices of commodities. The key message to the global commodity market is that in 2018 and the future years, China s central government will tolerate a slower GDP growth rate, which is likely to stay above 6.8% in Going forward, however, the market should not be surprised if it drops to below 6.5% in the near future. It is also possible that the official GDP growth rate might be adjusted to a slightly lower level as needed. Since China s overall economic growth might be slower, its demand for commodities may decline. The phasing out of obsolete industries, which are poor in efficiency and quality, will also help reduce demand for commodities, as China s supply side reform progresses. Finally, international commodity prices are determined by many factors, but mostly by supply and demand. It is widely accepted that a steady and moderately growing commodity market is a positive factor for the global economy, particularly for many raw material producing emerging countries. However, it might be difficult for international commodity prices to reach and maintain a high level, mostly because the peak demand from the Chinese market might already be history. Core Commodity CRB Commodity Index Year End Data (Thomson Reuters) Source: Bloomberg PwC 19
22 Authors Allan Zhang Chief Economist PwC China +86 (10) G. Bin Zhao Senior Economist PwC China +86 (21) Acknowledgements Special thanks to Sanjukta Mukherjee, Lan Lan and Smriti Mathur for their contributions to the report. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PwC. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. CN C1
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2017 Results Announcement Beijing/Hong Kong March 28, 2018 Disclaimer This information was prepared by the China Construction Bank Corporation ( CCB or the Bank ), without being independently verified.
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