Economic Acumen. China s economic strength sustained in 1H2018. In Brief. July 16, Commentary by CEBI Research Team

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1 gg July 16, 2018 Economic Acumen Commentary by CEBI Research Team In Brief China s GDP witnessed a solid growth of 6.7% YoY in 2Q2018 (Consensus 6.7% and 1Q2018 s 6.8%) and 6.8% YoY in 1H2018 (Consensus 6.7% and 2017 s 6.9%), signaling the pickup trend of economic activities. Domestic demand and external trade surged steadily, indicating that China s economy stays on the path of recovery. For 2H2018, the escalation of trade tensions triggered by the U.S to impose tariffs on Chinese goods may endanger China s growth momentum. China s policymakers will remain cautious to handle economic fluctuations by exercising appropriate economic policies to withstand the negative impact of trade disputes on external demand. Domestic demand remains as the key growth driver of the economy in which consumer spending and fixed asset investment will play a bigger economic role in 2H2018. We believe the overall macroeconomic conditions remain stable and the economy will expand by 6.5% YoY in 2H2018 with which 2018 GDP growth will reach 6.6% YoY. Banny Lam Head of Research Banny.lam@cebi.com.hk (852) China s economic strength sustained in 1H2018 The first half of 2018 was marked by stable recovery of economic activities in China, whose major indicators were growing at varying degree. China s GDP witnessed a solid growth of 6.7% YoY in 2Q2018 (Consensus 6.7% and 1Q2018 s 6.8%) and 6.8% YoY in 1H2018 (Consensus 6.7% and 2017 s 6.9%), signaling the pickup trend of economic activities. Job market pointed to stable trend as June survey-based urban unemployment rate stayed at 4.8%. Domestic demand and external trade surged steadily, indicating that China s economy stays on the path of recovery. For 2H2018, the escalation of trade tensions triggered by the U.S to impose tariffs on Chinese goods may endanger China s growth momentum. In sum, despite the trade war headwinds facing external trade sector, China s macroeconomic fundamentals remain strong on achieving the great progress in structural reforms including reduction of industrial production overcapacity and deleveraging with which the economy grows with more emphasis on quality and efficiency. China s policymakers will remain cautious to handle economic fluctuations by exercising appropriate economic policies to withstand the negative impact of trade disputes on external demand. Domestic demand remains as the key growth driver of the economy in which consumer spending and fixed asset investment will play a bigger economic role in 2H2018. We believe the overall macroeconomic conditions remain stable and the economy will expand by 6.5% YoY in 2H2018 with which 2018 GDP growth will reach 6.6% YoY. FAI decelerated in 1H2018. YTD growth of FAI was 6.0% YoY in 1H2018, in line with consensus estimate but down from 7.2% in It was mainly driven by slowing growth momentum of investment in infrastructure (+7.3% YTD YoY vs 1Q2018 s 13.0%) and real estate investment (+ 9.7% YTD YoY vs 1Q2018 s 10.4%). In general, the government s recent effort to launch more infrastructure projects and the initiatives to accelerate project approval should help prop up growth in FAI. We reassert that investment in railway and other urban infrastructures will continue to become the major growth driver of the economy in 2H

2 Industrial production posted a stable trend in 1H2018. In June and 2Q2018, industrial production expanded by 6.0% YoY (May s 6.8% YoY) and 6.6% YoY (1Q2018 s 6.8%). Although industrial production demonstrated slowing momentum in 2Q2018, general growth of outputs in 1H2018 showed steady trend at 6.7% YoY (2017 s 6.6%). Expansion of overall manufacturing activities in most product categories were the major drivers. In particular, the valueadded growth of Computer, Communication Equipment and Other Electronic Equipment, Manufacture of Special-Purpose Machinery and Manufacture of Medicines went up significantly by 12.4% YoY, 11.1% YoY and 10.9% YoY in 1H2018. We believe that industrial production will maintain stable growth momentum in 2H2018. Retail sales maintained stable growth momentum in 1H2018. Retail sales in June surged by 9.0% YoY, higher than consensus 8.8% and May s 8.5%. National online retail sales reached Rmb4,081.0bn in 1H2018, a year-on-year growth of 30.1%. In general, retail sales growth for the first half of 2018 was mainly driven by sizeable growth in Comestics (14.2% YoY), Commodities (12.6% YoY), Petroleum and Related Products (11.9% YoY), Communication Appliances (10.6% YoY), Household Appliances and AV Equipment (10.6% YoY) and Furniture (10.1% YoY), Going forward, retail sales is likely to trend up on the government s efforts to sustain robust growth of consumption. We believe the government will prioritize growth in domestic demand with which services consumption and e- commerce will emerge to me the major growth drivers. Mild consumer inflation in 1H2018. China's June CPI inflation grew 1.9% YoY (-0.1% MoM), standing in line with the consensus estimate but slightly lower than May s inflation of 1.9%. The continuation of mild inflation was due to a year-to-year mild increase in food price at 0.3% YoY (-0.8% MoM). 1H2018 inflation remained at a stable level of 2.0%. China s producer prices posted a positive growth of 4.7% YoY (+0.3% MoM) in June, which was higher than the consensus estimate of 4.5% and May s 4.1% YoY (+0.4% MoM). The extended rebounding of producer prices was mainly attributed to surging energy prices as producer price index of Extraction of Petroleum and Natural Gas for June and 1H2018 posted 19.9% YoY (May 14.8%) and 12.3% (Jan-May: 10.9%). The rise of factory prices during 1H2018 reached 3.9%, demonstrating an upward trend and reflecting the continuation of stable economic recovery. In sum, the stable trend of CPI and PPI indicates that China s economic momentum remains stable. External trade posted steady growth in 1H2018 amid the escalation of trade friction. Surrounded by escalating trade friction with the U.S., China s external trade still maintained a steady growth in 1H2018, with exports and imports growing at 4.9% YoY and 11.5% YoY. Trade surplus reached RMB bn. However, on both monthly and quarterly basis, growth of total trade posted slowing momentum as June exports and imports rose only 3.1% and 6.0% (May s 2.8% and 15.6%) while 2Q2018 exports and imports 2

3 surged only 3.2% and 11.0% (1Q2018 s 7.4% and 11.7%). The latest release of China s June official New Export Orders and Import Indexes, the sub-index of manufacturing PMI, fell to 49.8 and 50, signaling that external trade sector starts to experience the impact of trade war in the near-term. In sum, a pessimistic outlook for international trade driven by increasing trade tensions between the U.S. and the rest of the world disrupts the global supply chain with which global trade will likely shrink to some extent in 2H2018. We believe overseas demand for Chinese products to soften on the kickoff of full-blown trade war, which in turn will undermine growth momentum of China s total trade. Provided that trading partners such as EU, Japan and ASEAN countries could maintain their current pace of growth and policy tools would be employed effectively by Chinese regulators, China s external trade sector should be able to resist the trade headwinds, lending support to the soft-landing of external trade growth in 2H2018. Credit demand remained stable in 1H2018. Monetary indicators demonstrated stable trend in 1H2018. June s new loans and M2 growth were Rmb1.84tr (Consensus: Rmb 1.53tr and May: Rmb1.15tr) and 8.0% YoY (Consensus: 8.4% and May: 8.3%), respectively, while the aggregate financing reached Rmb1.18tr (Consensus: Rmb 1.4tr and May: Rmb 0.76tr). Dipping M2 growth reflected the slowdown of the pace of lending, signaling that the central government aims at containing the risks from a continued build-up in debt and an overheating housing market. Nevertheless, PBOC will continue to maintain ample liquidity into the banking system through targeted RRR cuts, reverse repo and medium-term lending facility (MLF). These monetary easing measures will be more flexible to accommodate the capital demand in

4 Fig. 1: China GDP growth (YoY ) Fig. 2: CPI and PPI (YoY %) 8.5% % 7.5% 7.0% 6.5% % CPI PPI Fig. 3: China Exports and Imports (RMB) YoY 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Total trades Exports Imports -100 Fig. 4: Trade Surplus (RMB bn) Fig. 5: China's urban unemployment rate (%) 5.2 Fig. 6: FAI (YTD YoY) % 8% 7% 6% 4.6 5% 4

5 Fig. 7: Infrastructure Investment (YoY %) Fig. 9: Retail sales (YoY) 12% 11% 11% 9% 9% 8% Q2018 1H2018 Fig. 11: New loans (RMB bn) and M2 (YoY) 12% 8% 6% 4% 2% 3,500 3,000 2,500 2,000 1,500 1, RMB Billon Fig. 8: Industrial Production (YoY) 17% 16% 15% 14% 13% 12% 11% 9% 8% 7% 6% 5% 4% 3% 2% -1% 0% 1% -2% -3% Fig. 10: Online Retail Sales (YoY) 38% 37% 36% 35% 34% 33% 32% 31% 30% Fig. 12: Aggregate Social Financing (RMB bn) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 0% New Loans (RHS) M2 (LHS)

6 China Economic Indicators Q2018 2Q2018 1H2018 Real GDP (YoY%) PMI Manufacturing (%) PMI Non-Manufacturing (%) Exports (RMB YoY %) 4.9 (1.8) (1.9) Imports (RMB YoY %) (0.6) (13.2) Trade Balance (RMB/bn) Exports (USD YoY %) 6.0 (2.9) (7.7) Imports (USD YoY %) 0.4 (14.1) (5.5) Trade Balance (USD/bn) CPI (YoY %) PPI (YoY %) (1.9) (5.2) (1.4) FAI (YTD/ YOY %) Real Estate Investment (YTD YoY %) Industrial Production (YoY %) Retail Sales (YoY%) New Lending (RMB/bn) M2 (YoY %) Aggregate Financing (RMB bn) Jun 17 July 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 17 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Real GDP (YoY%) PMI Manufacturing % PMI- Nonmanufacturing% Exports (RMB YoY %) (9.9) Imports (RMB YoY %) (0.2) Trade Balance (RMB/bn) (31.6) Export (USD YoY %) (2.9) Import (USD YoY %) Trade Balance (USD/bn) (5.3) CPI (YoY %) PPI (YoY %) FAI (YTD/ YOY %) Real Estate Investment (YTD/ YoY %) Industrial Production (YoY %) Retail Sales (YoY%) New Lending (RMB/bn) M2 (YoY %) Aggregate Financing (RMB bn) Urban Unemployment Rate (%) Urban Unemployment Rate in 31 major cities (%)

7 World Economic/Financial Indicators Global Indices Money market Index Closing P/E One Week Yield (%) One Week Price chg(%) chg(%) U.S. US Fed Fund Rate DJIA 25, US Prime Rate S&P 500 2, US Discount Window NASDAQ 7, ECB Rate (Refinancing) EUR BOJ Policy Rate FTSE 100 7, US Treasury (1 Mth) DAX 12, US Treasury (1 Yr) CAC40S 5, US Treasury (5 Yr) STOXX EUR US Treasury (10 Yr) Asia US Treasury (30 Yr) HSI 28, Month LIBOR HSCEI 10, Month LIBOR CSI300 3, Japan 1-Yr Gov. Bond SSE Composite 2, Japan 10-Yr Gov. Bond SZSE Composite 1, German 1-Yr Gov. Bond NIKKEI , German 10-Yr Gov. Bond KOSPI 2, China Benchmark Interest TWSE 10, China 1-Yr Gov. Bond S&P/ASX 200 6, China 5-Yr Gov. Bond MSCI Index China 10-Yr Gov. Bond MSCI WORLD 2, O/N SHIBOR MSCI DEVELOPED mth SHIBOR MSCI EMERGING 1, HK Base rate MSCI US 2, O/N HIBOR MSCI UK 2, mth HIBOR MSCI France O/N CNH HIBOR MSCI Germany mth CNH HIBOR MSCI China Corporate Bonds (Moody s) MSCI Hong Kong 15, Aaa MSCI Japan 1, Baa * As of 16/7/2018 closing for Asian markets, previous date for other markets. Global Commodities Currency market Unit Price One Week One Week Spot Rate chg(%) chg(%) Energy US Dollar Index NYMEX WTI USD/bbl Euro/USD ICE Brent Oil USD/bbl GBP/USD NYMEX NatGas USD/MMBtu AUD/USD Basic Metals USD/CAD LME Alum.Cash USD/MT 2, USD/JPY CMX Cop.Active USD/lb USD/CHF LME Steel Rebar USD/MT USD/CNY Midpoint LME Lead Cash USD/MT 2, USD/CNY Precious Metals USD/CNY NDF CMX Gold USD/KRW 1, mth Spot pr Gold Futures USD/KRW 1, USD/CNH CMX Silverbn USD/KRW USD/HKD NYMEX Platinum USD/T. oz CNY/HKD Agri, Products CNH/HKD CBOT Corn USD/bu USD/KRW 1, CBOT Wheat USD/bu USD/TWD NYB-ICE Sugar USD/lb USD/SGD CBOT Soybeans USD/bu USD/INR All data sources: Bloomberg, CEBI, NBS 7

8 Disclosures Analyst Certification We, LAM Chiu Kei, Banny (CE Number: AGH217), being the persons primarily responsible for the content of this research report, in whole or in part, hereby certify that all of the views expressed in this report accurately reflect our personal view about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. We and/or our associates have no financial interests in relation to any listed company(ies) covered in this report, and we and/or our associates do not serve as officer(s) of any listed company(ies) covered in this report. Disclaimer This report is for our clients only and is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expresses or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. CEB International Capital Corporation Limited is under no obligation to update or keep current the information contained herein. CEB International Capital Corporation Limited relies on information barriers to control the flow of information contained in one or more areas within CEB International Capital Corporation Limited, into other areas, units, groups or affiliates of CEB International Capital Corporation Limited. The compensation of the analyst who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of CEB International Capital Corporation Limited as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither CEB International Capital Corporation Limited nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. Additional information will be made available upon request. Copyright 2018 CEB International Capital Corporation Limited No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of CEB International Capital Corporation Limited. Office address: CEB International Capital Corporation Limited, 22/F AIA Central, 1 Connaught Road Central, Hong Kong. Tel: (852)

Economic Acumen. The PBOC s RRR cut to resist growth headwinds. In Brief. June 25, Commentary by CEBI Research Team

Economic Acumen. The PBOC s RRR cut to resist growth headwinds. In Brief. June 25, Commentary by CEBI Research Team gg June 25, 2018 Economic Acumen Commentary by CEBI Research Team In Brief The People s Bank of China (PBOC) announced a 50bp cut in the required reserve ratio (RRR), effective July 5, 2018. Overall, the