China Economic Quarterly Q4 2016

Transcription

1 February 2017 Major economic indicators p1 /Policy updates p12 /Hot topic analysis p13 China Economic Quarterly Q China announces new measures to attract foreign investment in

2 Content I. Major economic indicators 1 II. Policy updates 12 III. Hot topic analysis What China plans to do in 2017? What's next for the Renminbi under Trump s presidency?

3 GDP (Trillions of RMB) I Major economic indicators Quarterly GDP values and quarterly and annual GDP growth rates % 7.30% 6.9% 8.00% 6.7% 7.00% % 5.00% % % 2.20% 1.70% 1.90% 2.00% 1.9% 1.80% 1.7% 2.00% 1.70% 1.60% 1.80% 1.70% 1.70% 1.8% 1.50% 1.30% 1.00% % Quarterly growth Annual GDP growth China s GDP in the fourth quarter of 2016 increased by RMB trillion or 6.8%. As a result, GDP for the whole year of 2016 reached RMB trillion, 6.7% higher than in In the fourth quarter, the primary industry, the secondary industry and the tertiary industry (services) grew 3.3%, 6.1% and 7.8% respectively. Overall, services accounted for 51.6% of total GDP and consumption contributed 64.6% to economic growth. In 2017, GDP growth is likely to retain its growth momentum, though growth rates could fall slightly as supply-side structural reform progresses and global economic uncertainties escalate. Source of data: Unless otherwise stated, economic data is from the National Bureau of Statistics and financial data from the People s Bank of China. PwC 1

4 2 China Economic Quarterly Q GDP composition

5 Percentage Fixed asset investment: accumulated growth rate 90% 80% 70% 60% 50% 40% 30% 20% Month Fixed asset investment as a proportion of GDP is increasing constantly in China 16% 14% 12% 10% 8% 6% 4% 2% Fixed asset investment remained a key driver in China s economic growth. By the end of 2016, fixed asset investment rose steadily by 8.1% from last year to RMB trillion, around 80% of GDP. Among them, state sector investment rose by 18.7% year-onyear, while private investment, accounting for 61.2% of the total investment, only increased by 3.2% in the year. This shows subdued business confidence, though its growth in the fourth quarter was slightly higher than in the previous quarters. Investment in the tertiary industry, which accounts for 58% of total investment, rose by 10.9% in line with overall GDP growth trend. Investment in infrastructure swelled by 17.4% to RMB trillion, or 20% of total investment. In 2017, the government will continue its massive investment in major state projects in the areas of clean energy, transport, communication and oil & gas pipelines, environmental protection, modern logistics, city rail, emerging industries and upgrading of manufacturing, as included in the 13 th Five-Year Plan. Yet the challenges are how to deal with the diminished marginal returns on investment and how to ensure future funds will flow into productive sectors instead of zombie enterprises. Fixed asset investment/gdp YOY growth rate of GDP (the right of the vertical axis) Source: Wind In 2016, the scale of PPP (public private partnership) projects surged to a couple of trillion yuan. It was originally designed to boost private investment mainly for infrastructure, but state-owned enterprises ultimately became the leading force. PwC 3

6 Growth rates in real estate The real estate sector became another booster of the economy after experiencing a surprisingly high growth in Sales of commercial properties rose 22.4% year-on-year, and real estate investment jumped by 6.9% (7.5% in real terms if deducting price factor) over the previous year to RMB 10.3 trillion, which is 17% of total fixed investment. The boom in real estate has also triggered growth of related industries, such as steel, construction, home decoration and furniture. However, due to the rapid rise of property prices in many cities, the government has recently staged new regulations to restrict further investment and speculative purchases by residents and investors. It is expected that this will have a knock-on effect on the housing market in China Economic Quarterly Q4 2016

7 China s money supply and foreign reserves (RMB trillion) (USD trillion) Narrow Money (M1) Broad Money (M2) Official Reserve Assets: Foreign Exchange Reserves China has maintained an aggressive monetary policy throughout Money supply (money & quasimoney) rose from RMB trillion at the beginning of the year to RMB 155 trillion by the end of 2016, making China s stock of currency in circulation equivalent to that of the US, the EU and Japan combined. Meanwhile, bank loans jumped 13.5% year-on-year to RMB trillion, RMB billion more than in Due to underdevelopment of the financial market, bank loans accounted for 69.9% of China s total financing for the real economy, and bond and capital markets only provided 16.8% and 7% of financing. Massive money supply has exerted great pressure on RMB s exchange rate, which fell from RMB 6.55 per dollar at the beginning of the year to RMB 6.92 per dollar at the end of Renminbi depreciation expectations and the explosive growth in outbound investment by Chinese companies had raised the demand for foreign currencies, causing China s foreign reserves to shrink from US$ 3.23 trillion at the beginning of the year to US$ 3.01 trillion at the end of 2016 (falling below the mark of US$3 trillion in January 2017), which brings the total to a six-year low. PwC 5

8 2015-Jan 2015-Feb 2015-Mar 2015-Apr 2015-May 2015-Jun 2015-Jul 2015-Aug 2015-Sep 2015-Oct 2015-Nov 2015-Dec 2016-Jan 2016-Feb 2016-Mar 2016-Apr 2016-May 2016-Jun 2016-Jul 2016-Aug 2016-Sep 2016-Oct 2016-Nov 2016-Dec Percentage Purchasing managers index 56.0% 55.0% 54.0% 53.0% 52.0% 51.0% 50.0% 49.0% 48.0% 47.0% 46.0% Manufacturing Non-manufacturing 50% breaking point China's manufacturing purchasing managers index (PMI) experienced the highest performance since 2012 in the fourth quarter of 2016, reaching 51.2%, 51.7%, and 51.4% respectively for the last three months, thanks to booming domestic demand, rising prices and growing activities in high-end manufacturing. A figure above 50% indicates expansion. In December, PMI for large-sized, medium-sized, and small-sized enterprises stood at 53.2%, 49.6% and 47.2% respectively. Meanwhile China's non-manufacturing PMI recorded a much stronger growth of 54.0%, 54.7% and 54.5% for the last three months of the year. These positive growth trends are likely to continue in China Economic Quarterly Q4 2016

9 Percentage Growth of industrial added values (for companies over certain scales) Month In the fourth quarter, industrial added values maintained its stable growth of 6.1%, 6.2%, and 6.0% in real terms in the last three months. For 2016, industrial added values expanded by 6%, 0.1% lower than in By ownership, industrial added values of SOEs went up 2.0%, collective enterprises fell by 1.3%, joint-stock enterprises rose 6.9%, and foreign-owned enterprises expanded by 4.5%. Among all the industries, manufacturing and hightech industry registered the highest growth rates of 6.8% and 10.8%, respectively. As for PMI, another positive development is industrial profits for enterprises above certain scales have reversed the downward trend and grown by 8.5% in 2016 over last year. While profits for mining industry declined by 27.5%, profits for equipment manufacturing and high-tech manufacturing rose by 8.4% and 14.8% respectively, signaling that China was on track to grow its Industry 4.0 capabilities. PwC 7

10 Growth rate Retail sales of consumer goods: accumulated growth rate Month Domestic consumption sustained its role as one of the most important drivers of economic growth in 2016, with total retail sales of consumer goods increasing by 10.4% year-on-year (the real growth rate was 9.2%) to RMB trillion. On a quarterly basis, it was 10.3%, 10.2%, 10.5% and 10.6% respectively with a stable growing trend. The national online retail sales of goods and services, accounting for 16% of total retail sales, stood at RMB 5.16 trillion, up by 26.2% from last year. As China s online shopping has gained popularity and will further expand, it will continue to erode traditional retail sales in the coming years. China s national per capita disposable income continued its growth momentum, rising by 8.4% (real growth of 6.3%) from last year to RMB 23,821 in Per capita consumption expenditure rose by 8.9% (6.8% in real term) from last year to RMB 17,111. It is expected that domestic consumption will remain active and a major driving force for economic growth in China Economic Quarterly Q4 2016

11 Quarterly balance of trade Source: Wind The total value of China s imports and exports in 2016 fell by 6.76% year-on-year to US$3.685 trillion, with exports falling by 7.7% and imports contracting by 5.5%, leading to a reduced trade surplus of US$510 billion, as compared with US$594.5 billion in In December, exports slipped 6.1% from a year ago and imports rose 3.1% year-on-year, much in line with expectations. China s trading situation is unlikely to improve significantly in the coming year, given the enduring sluggish global demand and heightened trade frictions with the developed markets, especially with the US. PwC 9

12 2015-Jan 2015-Feb 2015-Mar 2015-Apr 2015-May 2015-Jun 2015-Jul 2015-Aug 2015-Sep 2015-Oct 2015-Nov 2015-Dec 2016-Jan 2016-Feb 2016-Mar 2016-Apr 2016-May 2016-Jun 2016-Jul 2016-Aug 2016-Sep 2016-Oct 2016-Nov 2016-Dec Growth (contraction) rate Producer price index and consumer price index Month PPI CPI The Producer Price Index (PPI) has dramatically improved in the last quarter of 2016, rising to 1.2%, 3.3%, 5.5% respectively from October to December, thanks to surges in commodity prices and the after-effect of the supply-side structural reform for cutting industrial capacity and inventory. As a result, both industrial production and market demand had increased. For the whole year of 2016, PPI went down by 1.4% year-on-year. PPI turned positive in September after 54 consecutive months of decline. It is expected to stay above zero in The consumer price index (CPI) remained stable for much of 2016, with the overall CPI increasing by 2.0% year-on-year. It is worth noting that most price hikes came from the food sector, where prices for fresh vegetables and pork went up 11.4% and 16.9% respectively due to cyclical supply shortages. Meanwhile, prices for healthcare went up 3.8%, as a result of rising demand for high quality services, and prices for household services rose 4.4% due to shortage of skilled labour. For 2017, we expect that CPI is likely to stay in the same positive range. 10 China Economic Quarterly Q4 2016

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14 II Policy update China s State Council announced on 17 January 2017 an unprecedented set of new measures to attract foreign investment. According to the document, the government will lower market entry restrictions on foreign investment in banking, securities, insurance, futures, credit rating, accounting and architecture design, and gradually open up markets of telecommunications, Internet, education and transport. On manufacturing, the government will lift restrictions in the production of rail transport equipment, motorcycle, fuel ethanol, and animal fat. Foreign invested enterprises (FIEs) are encouraged to invest in high-end, smart and green manufacturing, participate in infrastructure projects in energy, water conservation and environmental protection. Thresholds in oil shale, oil sand and shale gas will be lowered, and the timeconsuming project approval system for Sino-foreign cooperation on oil and gas will be shifted to registration only. More liberal measures are in the financial sector. For the first time, FIEs will be allowed to list in the Shanghai and Shenzhen exchanges, including mainboard, SME board and growth enterprise market, and to issue bonds in the Chinese markets to expand financing channels. FIEs are encouraged to set up research and development centres in China and step up cooperation with domestic peers. They are also allowed to join national science and technology programmes, which were previously off-limits to them. Meanwhile, the government vows to improve protection of intellectual property rights (IPR) and set up IPR arbitration centres in China. These measures are released against the background of dwindling foreign investment in China, especially in manufacturing, in recent years, rising cost of production, depreciating RMB, more Chinese companies relocating to lower cost neighbouring countries and even to America, and bold tax cut plans by the US and the UK for strengthening their competitiveness. They also resonate with the calls of President Xi Jinping at the World Economic Forum in Davos for opposing protectionism and promoting further globalisation and opening-up. Yet it remains to be seen when the details and timetables for enforcing these measures will be released by the designated government departments. At times, reform measures announced by the top were delayed or watered down by interest groups. China has issued its 13th Five- Year Plan ( ) to strengthen the protection and utilisation of intellectual property rights. According to the plan, China's invention patent ownership should increase from 6.3 per 10,000 people in 2015 to 12 in 10,000, and international applications will double from 30,000 in 2015 to 60,000 by Meanwhile, intellectual property royalties earned abroad will rise from US$4.44 billion in 2015 to US$10 billion in The plan laid out seven major tasks for the development of IPRs, such as improving the legal system and protection for IPRs, promoting industrial upgrading and international cooperation. 12 China Economic Quarterly Q4 2016

15 Hot topic analysis III What China plans to do in 2017? China has managed to achieve an impressive economic growth of 6.7% in 2016 despite all the difficulties. Yet 2017 will be a more challenging year for the country, due to rising protectionism around the world and downward economic pressures and financial risks at home. It is also a crucial year as the all-important 19th Party Congress will be held in autumn 2017, when the current leadership team will be significantly reshuffled. China needs an amicable and stable macro environment to ensure a smooth running of the meeting. Understandably, seeking progress while maintaining stability was adopted as the core theme for 2017 by the annual tone-setting Central Economic Work Conference concluded on 16 December Centred on improving quality and effectiveness of growth, the government sets the goals of stabilising growth, deepening reform, adjusting economic structure, benefitting the people and preventing financial risks in 2017, according to the statement of the conference. To maintain stability, the government plans to: Pursue a proactive fiscal policy to partly cope with the needs for the supply-side structural reform (SSR) and a robust monetary policy to maintain stable liquidity. Hopefully this will help keep a reasonable level of GDP growth (above 6%), though no specific figure was mentioned, given the huge uncertainties ahead and the dent-on effect by SSR. Improve regulation to ensure there will be no systemic financial risk. The government will step up efforts to curb the debt-driven financial markets, reduce leverage ratios of SOEs and regulate the debt-raising from local governments. A few rule-breaking cases are expected to be exposed and dealt with as a warning sign. Establish a market-oriented longterm property market mechanism that can curb real estate bubbles and prevent erratic fluctuations through land, investment, legal, fiscal, taxation and financial means. Credits for speculative house purchasing will be prohibited, as houses are built to be inhabited, not for speculation, in President Xi s words. Keep a relatively stable exchange rate of the currency. This means the government is likely to continue its current practice of market interventions to prevent over-fluctuation of the Renminbi against the dollar. PwC 13

16 Meanwhile the government aspires to drive some major changes and growth in a number of areas, as it plans to: Deepen the SSR process, with a focus on increasing efficient supply, improving supply quality and enhancing compatibility of supply with demand. Further reduce industrial capacity in coal and steel (possibly extending to include auto and new energy sectors); shut down a plethora of lossmaking zombie enterprises through mergers and reorganisations while making arrangements for laid-off workers; allow the market to play a bigger role in industrial restructuring. Cut taxes, fees and other costs for companies and streamline administrative approval procedures. Speed up the creation of a flexible and efficient marketoriented operation mechanism for SOEs; push through mixedownership reform, especially in electricity, oil and gas, railway, civil aviation, telecoms and military industries; conduct pilot reforms for state-owned asset investment companies where the state will act as a stakeholder rather than a SOE manager; encourage debt-forequity swaps through market and law-based instruments to lower corporate leverage. Advocate quality first among businesses, raise national quality standards and adopt comprehensive quality management by upholding the craftsman spirit and building up corporate brands; encourage innovation-driven development and boost growth of strategic emerging industries and industrial upgrading. Build a law-based business environment to attract more foreign investment; level the playing field for small and micro businesses by providing better conditions on market access and resources allocation. Accelerate the legislation of a civil code to better protect property rights; overturn wrong convictions concerning infringement of property rights for enterprises, and protect and support entrepreneurship. To improve access to financing for the private sector, the government will allow the setting up of more private banks. Press ahead with peoplecentred urbanisation and promote the overall development strategies for western, central, northeast and coastal regions; further promote the three grand strategies for the development of Beijing- Tianjin-Hebei cluster, Yangtze River Economic Belt and the Belt and Road region. In summary, while the Chinese government is committed to resolving the inherent structural issues such as industrial overcapacity, housing bubbles, SOE reform and rejuvenation of the real economy, don't expect to see a bold reform plan in 2017, as stability will be the priority. It won t be smooth sailing, and the prospect of heightened trade frictions with developed countries will make it more difficult. Watch out. 14 China Economic Quarterly Q4 2016

17 What's next for the Renminbi under Trump s presidency? During his presidential campaign, Donald Trump has indicated that the Chinese government may have intentionally depreciated the Renminbi to gain a competitive advantage for Chinese exports. However, this is a far cry from reality. Average exchange rate USD:RMB ( ) (days) 9.0 Source: Wind Contrary to these statements, the Renminbi has appreciated sharply against the dollar instead of depreciation over the past decade since Since the appreciation of the dollar started from mid-2015, the Chinese government has painstakingly made efforts to slow down the speed of the yuan's depreciation against the dollar. China s central bank is believed to have spent about USD 800 billion from its foreign currency reserves to stabilise the Renminbi. China has significantly changed its exchange rate formation mechanism over the past decade, as it has shifted from hard peg to the US dollar nearly ten years ago, to a managed float regime. Currently, the Renminbi s exchange rate is based on a basket of currencies, not only the US dollar. According to the IMF definition, this is crawl-like arrangement which is one type of soft peg. PwC 15

18 China's foreign currency reserves: monthly data ( ) (100 million USD) Source: Wind 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 China s reform on liberalising its exchange rate regime has been widely recognised, especially by the IMF. Last September, to mark the launch of the new SDR basket including the Chinese currency, Ms. Christine Lagarde, Managing Director of the IMF, commented that the Renminbi s inclusion reflects the progress made in reforming China s monetary, foreign exchange and financial systems, and acknowledges the advances made in liberalising and improving the infrastructure of its financial markets. Earlier this year, former Federal Reserve Chairman Ben Bernanke also indicated that calling China a currency manipulator doesn't fit with reality." He acknowledged, China right now is working very hard to keep the Renminbi from falling. Nevertheless, what are the prospects of Renminbi s exchange rate in 2017? What actions should China take under the current situation? According to IMF, there are some 65 countries that have currently adopted the floating exchange rate regime, which means the market dictates movements in the exchange rate. Though Japan and the UK intervene their exchange rate to a great extent, it is still a floating exchange rate, while the Canadian dollar is regarded as a pure floating currency. 16 China Economic Quarterly Q4 2016

19 Real dollar monthly index: the major currencies ( ) Source: Wind In order to avoid the possibility of being labelled as a "currency manipulator", the best option for China is to press ahead with the liberalisation of the yuan exchange rate, transforming from the current managed exchange rate regime to floating rate regime as soon as possible. Meanwhile, capital control measures would continue to serve as the firewall to prevent unpredictable capital outflow from China, even as this policy is believed to have caused extra barriers to China s overseas acquisition deals. Going forward, the Renminbi s exchange rate against the dollar in 2017 will be affected by many factors, including China s economic performance and changes to its interest rate. Externally the US dollar remains the biggest variable as it still carries the heaviest weight in Renminbi s currency basket. Thus far the US markets have rallied but uncertainties linger over which policies the Trump Administration may enact and what their immediate and long-term effects will be on the US economy. To date, the US dollar index is close to historical highs. Even if President Trump's economic policies stimulate the US economy with higher growth rate, there could be limited room for the dollar to rise any further. Besides, a too strong US dollar could be a restraint for the full recovery of the US economy. Given these circumstances, we expect that the Renminbi could further depreciate at least a few percentage points to the dollar in 2017, as the majority of investors have expected, but an appreciation could be not be ruled out, at least for the short term. PwC 17

20 Authors Allan Zhang Chief Economist PwC China +86 (10) G. Bin Zhao Senior Economist PwC China +86 (21) Marketing and Communications Cynara Tan Head of Marketing and Communications Asia Pacific 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 PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.