LI & FUNG China Trade Quarterly

Transcription

1 LI & FUNG China Trade Quarterly Domestic and Foreign IN THIS ISSUE : Domestic Trade May 2010 Issue 18 Retail sales of consumer goods rose by 17.9% yoy in 1Q10, 2.4 ppt. higher Part One : Domestic Trade than in FY09. Automobiles, furniture, home appliances, and building and decoration I. Recent development 2 materials achieved impressive sales growth. China s consumers have remained optimistic about the economic prospects, as shown by the consumer confidence II. Highlights 9 index. Growth of CPI, PPI and the purchasing price index of raw material, fuel and III. Outlook 17 power further accelerated in 1Q10. We believe the PPI will continue to be bolstered by improving domestic and export demand, as well as rising costs of raw material, energy and labour in the near future. CPI will show relatively mild growth, especially Part Two : Foreign Trade as food prices are expected to stay stable in the coming months. Top 100 retailers in China accounted for around one-tenth of the total market I. Recent developments 22 share in The share has been on a downward trend since 2007, and China s retail landscape remains highly fragmented. II. Highights 28 Sales of home appliances under the rural subsidies scheme soared to 31.7 billion yuan in 1Q10, up 6.9 times over a year ago. The surge in sales was III. Outlook 32 attributable to the government s efforts to strengthen the scheme in early The first two consumer finance companies in China s history, the Bank of Beijing Consumer Finance Company and the Sichuan Jincheng Consumer Finance Company, started operation on 1 Mar Foreign Trade China s export grew strongly by 28.7% yoy; import growth soared to 64.6% yoy in 1Q10. For the first time in seventy-one months, China recorded a trade deficit of US$ 7.2 billion in March. Contrary to the case in 2009, China s export to the EU rose much more than its export to the US and Japan in 1Q10, suggesting relatively fast recovery of demand from the EU. Export to the EU grew by 31.0% yoy, whilst export to the US and Japan gained 19.7% yoy and 17.7% yoy respectively in 1Q10. Helen Chin, Timothy Cheung Tel: (852) helenchin@lf1937.com timothycheung@lf1937.com 11/F, LiFung Tower, 868 Cheung Sha Wan Road, Hong Kong Tel : (852) Fax : (852) lfdc@lf1937.com Boosted by the establishment of the ACFTA since 1 Jan 2010, China s trade with ASEAN registered a stunning growth of 61.3% yoy in 1Q10, compared to -7.9% yoy in Serious labour shortages in the coastal provinces have increased labour costs significantly. Enterprises in the coastal provinces have to offer higher salaries in a bid to hire or retain workers. Besides, local governments in a number of provinces and municipalities have raised the minimum wage levels in their regions in recent months. The volume of global merchandise trade contracted sharply by 12.2% in 2009, mainly as a result of the sharp fall in global demand, shortage of trade finance, as well as the imposition of protectionist measures in many countries. The WTO predicts that the volume of the global merchandise trade will grow by 9.5% in

2 Li & Fung China Trade Quarterly May 2010 Issue 18 Part One: Domestic Trade I. Recent Development 1. China s economic growth reached 11.9% yoy in 1Q10, the highest since 4Q07 China s economic growth further accelerated from 10.7% yoy in 4Q09 to 11.9% yoy in 1Q10, the highest since 4Q07. Such rapid growth was attributable to solid domestic consumption and investment, the significant improvement in China s export, as well as the low comparison base in 1Q09. Overall, China s GDP amounted to 8.1 trillion yuan in 1Q10. (See exhibit 1) Looking forward, we expect that China s economic growth will remain robust for the rest of the year, supported by buoyant domestic demand and the continuous recovery in global demand. Nevertheless, there are growing concerns over an overheated economy, rising inflation, as well as the looming property bubble, which could harm the sustainability of China s economic growth. Exhibit 1: China s real GDP growth, 2Q09-1Q10 FY09 8.7% 2Q09 7.9% 3Q09 9.1% 4Q % 1Q % Source: National Bureau of Statistics, PRC 2. Retail sales grew steadily in 1Q10 Total retail sales of consumer goods reached 3,637.4 billion yuan in 1Q10, up nominally by 17.9% yoy, 2.4 ppt. higher than in FY09. By month, the nominal growth rate of retail sales rose from 14.0% yoy in January to 22.1% yoy in February, and then moderated to 18.0% yoy in March (See exhibit 2) 2

3 Domestic and Foreign Exhibit 2: Total retail sales of consumer goods, Apr Mar 2010 Source: National Bureau of Statistics, PRC Urban retail sales was 3,057.1 billion yuan in 1Q10, up nominally by 18.4% yoy. Meanwhile, rural retail sales totaled billion yuan, up nominally by 15.4% yoy. 1 In 1Q10, the sales of merchandise goods was 3,229.7 billion yuan, up nominally by 18.1 % yoy; whilst the catering sales was billion yuan, up by 16.7% yoy. 2 Among categories, automobiles, furniture and household appliances achieved impressive growth. In nominal terms, the sales of automobiles rose by 39.8% yoy; that of furniture went up by 37.6% yoy, and that of home appliances and video equipments grew by 29.6% yoy. (See exhibit 3) 1 Since Jan 2010, the NBS has redefined the categories of urban retail sales and rural retail sales. For example, urban retail sales in 1Q09 amounted to 1,983.4 billion yuan, according to the previous definition of urban retail sales category. The urban retail sales in 1Q09 was adjusted to 2,582.0 billion yuan, according to its new definition. 2 Since Jan 2010, the NBS has adopted new categories for total retail sales of consumer goods. Sales of merchandise goods and catering sales replaced the previous categories of retail sales in the wholesale and retail industries and retail sales in the accommodation and catering industries. 3

4 Li & Fung China Trade Quarterly May 2010 Issue 18 Exhibit 3: China s retail sales growth by commodity, 2009 & 1Q10 yoy growth (%) 1Q09 1H09 1-3Q09 FY09 1Q10 Clothing, shoes, hats and textiles* NA NA Cosmetics Stationeries and offices accessories Goods for daily use Home appliances and video equipments Furniture Grain, oil, food, beverages, tobacco, and liquor** NA NA Gold, silver, and jewelry Telecommunication equipments Automobiles Petroleum and related products Building and decoration materials NA NA Sports and entertainment products*** NA NA NA Chinese and western medicine**** NA NA NA * Clothing, shoes, hats and textiles replaced the previous clothing category in the NBS announcement in 1-3Q09 ** Grain, oil, food, beverages, tobacco, and liquor replaced the previous categories of grains and oil and meat, poultry and eggs in the NBS announcement in 1-3Q09 *** Sports and entertainment products is a newly added category in the NBS announcement **** Chinese and western medicine is a newly added category in the NBS announcement Source: National Bureau of Statistics, PRC 3. Chinese consumers have remained optimistic China s consumers, in general, have remained optimistic about the economic prospects. The consumer confidence index improved from in Dec 2009 to in Jan 2010, and then dropped slightly to in February. 3 (See exhibit 4). 3 Starting from 4Q 2009, the National Bureau of Statistics (NBS) has cooperated with the Nielsen Company to conduct a more extensive survey on consumer confidence. Compared with the survey conducted solely by the NBS in the past, the new survey has a larger sample size and covers wider area. Besides, since January 2010, the NBS has started to release the index based on a new methodology. To maintain the continuity of the data, the historical figures (i.e. Indices of November 2009 and before) were also adjusted. While the NBS only released the adjusted data since January 2009, we worked out the adjustments for the 2008 data for the purpose of compiling exhibit 4. The new set of data is easy to interpret: A reading above 100 indicates that consumers tend to be optimistic; a reading below 100 indicates that consumers tend to be pessimistic. 4

5 Domestic and Foreign Exhibit 4: China's consumer confidence index, Mar Feb 2010 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Source: National Bureau of Statistics, PRC 4. Both urban and rural households income showed faster nominal growth in 1Q10 Compared with FY09, both rural and urban households income showed faster nominal growth in 1Q10. The per capita disposable income of urban households, which reached 5,308 yuan in 1Q10, grew by 9.8% yoy in nominal terms, 1.0 ppt. higher than that in FY09. Meanwhile, the per capita cash income of rural households amounted to 1,814 yuan in 1Q10. The nominal growth rate accelerated to 11.8% yoy in 1Q10, up from 9.3% yoy in FY09. Nevertheless, with higher prices of goods and services, the real growth rate of urban income was weaker in 1Q10 than in FY09. The per capita disposable income of urban households rose by 7.5% yoy in real terms in 1Q10, compared to 9.8% yoy in FY The growth rates of CPI, PPI and the purchasing price index of raw material, fuel and power further accelerated in 1Q10 Due largely to the rise in food prices and the low comparison base in the same period last year, the growth rate of China s consumer price index (CPI) 4 stepped up from 0.6% yoy in Nov 2009 to 1.9% yoy in Dec 2009, moderated to 1.5% yoy in Jan 2010, but then rebounded strongly to 2.7% yoy in February. The CPI growth softened a bit to 2.4% yoy in March. (See exhibit 5) Food prices rose 6.2% yoy (and a staggering 3.3% mom) in February and 5.2% yoy in March, up from 3.7% yoy in January. It is noteworthy that the strong CPI growth recorded in February was distorted upward by the different timing of the Chinese New Year in 2009 and 2010, as prices of goods and services are normally higher during the Chinese New Year holidays. 5 (See exhibit 6) 4 The CPI, compiled by the National Bureau of Statistics of China, measures the price of a basket of goods and services that a typical household purchases. 5 The Chinese New Year was in January in 2009, but was in February in

6 Li & Fung China Trade Quarterly May 2010 Issue 18 Looking ahead, the CPI growth sets to trend upward in the coming months, supported by factors such as strengthening domestic demand, rising property prices, the buildup of inflationary expectations, as well as the low comparison base in 2Q09. Exhibit 5: China s CPI growth, Apr Mar 2010 Apr % May -1.4% Jun -1.7% Jul -1.8% Aug -1.2% Sep -0.8% Oct -0.5% Nov 0.6% Dec 1.9% Jan % Feb 2.7% Mar 2.4% Source: National Bureau of Statistics, PRC Exhibit 6: China s CPI growth by commodity, Oct Mar 2010 yoy growth (%) Oct-09 Nov Dec Jan-10 Feb Mar Food Tobacco & Liquor Clothing Household services, maintenance and renovation Medical healthcare & personal care Transportation and communication Recreational, educational products & services Housing Source: National Bureau of Statistics, PRC The growth rate of China s producer price index (PPI) 6 returned to positive territory in Dec 2009, reaching 1.7% yoy. Since then, the PPI growth has continued its upward trend, accelerating to 4.3% yoy in Jan 2010, rising further to 5.4% yoy in February, and then edging up to 5.9% yoy in March. (See exhibit 7) We believe the PPI will continue to be bolstered by improving domestic and export demand, rising raw material and energy prices, and labour costs in the near future. Particularly noteworthy is that the minimum wage levels in some provinces in China such as Jiangsu, Guangdong, etc. have been revised upward recently. Detailed discussion can be found in our Li & Fung China Sourcing Quarterly, Issue 3. 6 The PPI, compiled by the National Bureau of Statistics of China, measures the prices of industrial products when they are sold for the first time after production. 6

7 Domestic and Foreign Exhibit 7: China s PPI growth, Apr Mar 2010 Apr % May -7.2% Jun -7.8% Jul -8.2% Aug -7.9% Sep -7.0% Oct -5.8% Nov -2.1% Dec 1.7% Jan % Feb 5.4% Mar 5.9% Source: National Bureau of Statistics, PRC China s purchasing price index of raw material, fuel and power 7 rose by 3.0% yoy in Dec 2009, the first positive yoy growth in twelve months, up from -3.6% yoy in Nov It then jumped to 8.0% yoy in Jan 2010, and further picked up to 10.3% yoy in February and 11.5% yoy in March, the highest in eighteen months. The accelerated growth of the price index reflected the increase in prices of production inputs, indicating greater cost pressure for Chinese manufacturers. (See exhibit 8 & 9) Exhibit 8: China s purchasing price index of raw material, fuel and power, Apr Mar 2010 (% yoy growth) Apr % May -10.4% Jun -11.3% Jul -11.7% Aug -11.4% Sep -10.1% Oct -8.4% Nov -3.6% Dec 3.0% Jan % Feb 10.3% Mar 11.5% Source: National Bureau of Statistics, PRC 7 The purchasing price index for raw material, fuel and power, compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power, purchased by industrial enterprises. 7

8 Li & Fung China Trade Quarterly May 2010 Issue 18 Exhibit 9: China s purchasing price index of raw material, fuel and power by selected commodity, Oct Mar 2010 yoy growth(%) Oct-09 Nov Dec Jan-10 Feb Mar Non-ferrous metals Fuel & power Ferrous metals Chemical materials Source: National Bureau of Statistics, PRC 6. China s industrial production growth remained robust in early 2010 China s industrial production growth remained robust in early 2010, rising from 18.5% yoy in Dec 2009 to 20.7% yoy in Jan-Feb It then slowed a bit to 18.1% yoy in March, due to the higher comparison base in Mar Overall, the industrial production registered growth of 19.6% yoy in 1Q10. Of which, the industrial output of heavy industry rose by 22.1% yoy; and that of light industry increased by 14.1% yoy in 1Q10. (See exhibit 10) Particularly noteworthy is that the export delivery value of industrial products witnessed rapid growth of 22.5% yoy and 25.7% yoy in Jan-Feb 2010 and March respectively, improving significantly from 12.4% yoy in Dec Such figures suggest that export demand played a more important role in driving China s industrial production. Exhibit 10: China s industrial production growth, Apr Mar 2010 Apr % May 8.9% Jun 10.7% Jul 10.8% Aug 12.3% Sep 13.9% Oct 16.1% Nov 19.2% Dec 18.5% Jan-Feb % Mar 18.1% Source: National Bureau of Statistics, PRC 8

9 Domestic and Foreign 7. Urban FAI growth rebounded a bit in 1Q10 Supported by huge public investment and private real estate investment, China s nominal fixed asset investment (FAI) hit 3,532.0 billion yuan in 1Q10. The growth rate was 25.6% yoy in 1Q10, moderated from 30.1% yoy in FY09. Of which, the urban FAI amounted to 2,979.3 billion yuan in 1Q10, up by 26.4% yoy, compared to the growth rate of 30.5% yoy in Taking a closer look at the monthly figures, the urban FAI growth actually rebounded a bit from 24.1% yoy in Dec 2009 to 26.6% yoy in Jan-Feb 2010, and then edged down to 26.3% yoy in March. Among different industries, the tertiary industry recorded urban FAI growth of 30.0% yoy in 1Q10, much higher than that of the secondary industry (22.4% yoy). Particularly noteworthy is that urban FAI growth in the real estate development jumped from 16.1% yoy in 2009 to 35.1% yoy in 1Q10, reflecting the booming property market in China. II. Highlights 1. Top 100 retailers in China accounted for around one-tenth of the total market share in 2009 The China Chain Store and Franchise Association (CCFA) released the list of the top 100 retail chain operators (the Top 100s) in March. According to the CCFA, the Top 100s achieved total sales revenue of 1,360 billion yuan, up by 13.5% yoy in The growth was the slowest since the list was launched in In 2009, the total sales revenue of the Top 100s accounted for 10.9% of the total retail sales of consumer goods in China The share has been on a downward trend since 2007 (see exhibit 11), and China s retail landscape remains highly fragmented. Exhibit 11: The top 100s share in national retail sales, Source: China Chain Store and Franchise Association (CCFA), National Bureau of Statistics, PRC 9

10 Li & Fung China Trade Quarterly May 2010 Issue Sales of home appliances in rural areas recorded stunning growth under the subsidy scheme Sales of home appliances under the rural subsidies scheme for home appliance purchases soared by 6.9 times over a year ago to 31.7 billion yuan in 1Q10. Around 16.0 million units of subsidized home appliances were sold in 1Q10, up 4.9 times over a year ago. Among the nine subsidized categories, sales of television sets, refrigerators and washing machines amounted to 11.3 billion yuan, 9.0 billion yuan and 4.2 billion yuan respectively in 1Q10. Together they accounted for 77.3% of total sales of subsidized home appliances during the period. Among all provinces, Henan witnessed the strongest sales, which totaled 3.8 billion yuan in 1Q10. Exhibit 12 shows the top 5 provinces in terms of sales of subsidized home appliances under the scheme. Exhibit 12: Top 5 provinces in terms of sales of subsidized home appliances under the rural subsidies scheme for home appliance purchases, 1Q10 Provinces sales of subsidized home appliances (billion yuan) 1. Henan Shandong Anhui Sichuan Jiangsu 2.0 Source: Ministry of Commerce Since early 2009, the government has extended the rural subsidies scheme for home appliance purchases nationwide. 8 Under this program, rural households are offered subsidies of up to 13% of the prices for purchases of designated household appliances. The recent surge in sales of subsidized home appliances is attributable to the government s efforts to strengthen the scheme in early In February, the price caps on subsidized products were significantly raised, and more models of the existing categories were covered. Looking ahead, the subsidy scheme will be extended to cover one more product category in the coming months. It is expected that sales of designated home appliances under the scheme will stay robust in the near term against the backdrop of the buoyant Chinese economy and rising rural income. 3. Sales of home appliances under the old-for-new (trade-in) subsidies scheme surged As of 20 Apr 2010, sales of home appliances under the pilot program of the old-for-new (trade-in) subsidies scheme totaled 39.1 billion yuan. Compared with 4Q09, the sales in 1Q10 were 61.6% higher in value terms and 60.9% higher in volume terms. 8 Prior to this, a pilot rural subsidies scheme for home appliances purchases had been implemented in 3 provinces and 1 city since Dec

11 Domestic and Foreign Since Aug 2009, the Chinese government has introduced the old-for-new (trade-in) subsidies scheme in nine relatively affluent areas, namely Beijing, Shanghai, Tianjin, Fuzhou, Changsha, Jiangsu, Zhejiang, Shandong and Guangdong. Home appliance buyers can receive subsidies of up to 10% of the prices of the new products for replacing old television sets, refrigerators, washing machines, air-conditioners or computers. In early Mar 2010, the Minister of the Ministry of Commerce Chen Deming disclosed that the scheme would be expanded to cover all provinces with recycling capabilities in China this year. We believe that the scheme will play a bigger role in promoting China s domestic consumption and recycling industries. 4. Two consumer finance companies have started operation in China The Bank of Beijing Consumer Finance Company and the Sichuan Jincheng Consumer Finance Company, the first two consumer finance companies in China s history, started operation on 1 Mar The launch of consumer finance companies would provide better financing access for consumers, as borrowers are not required to put up collateral and consumer loans can usually be approved more quickly. Nevertheless, the impacts on the retail sector are still limited at this stage. For example, the Bank of Beijing Consumer Finance Company only approved 122 loans amounting to around 1 million yuan in March. There were several characteristics of the consumer loans offered by the Bank of Beijing Consumer Finance Company. First, the amount of each loan was small, ranging from 600 yuan to 41,950 yuan. Second, short-term loans (less than one year) accounted for 81.2% of the total loans. Third, most borrowers were at the age of Fourth, around 66.7% of the borrowers had monthly income of less than 5,000 yuan. Fifth, about 68.9% of the total loans were used for purchases of electronic products such as computers and mobile phones. China s banking regulator approved the establishment of consumer finance companies in China in early Jan Four consumer finance companies would be set up in Beijing, Tianjin, Shanghai and Chengdu under the pilot programme of consumer finance companies. At the trial stage, the consumer finance companies are only allowed to offer loans for purchasing consumer durables (such as home appliances, electronic products, etc.) or making general consumer expenditures (such as travel, home decoration, wedding, education, etc.), but are not permitted to provide auto and mortgage loans. 5. The government raised fuel prices by 4-5% on 14 April, in response to the rise in the global crude prices On 14 Apr 2010, the Chinese government raised the maximum retail prices of gasoline and diesel by 4-5%, leading to increase in transportation costs in China. This was the first time in 2010 the government adjusted fuel prices. The purpose of the price adjustments was to allow domestic fuel prices to reflect the movement in global crude prices since 10 Nov 2009, the previous time when fuel prices were adjusted upward. 11

12 Li & Fung China Trade Quarterly May 2010 Issue 18 Indeed, since the introduction of the refined oil pricing mechanism in late Dec 2008, fuel prices have been adjusted more frequently than before, as fuel prices would be determined by the following factors: global crude prices, domestic refining costs, taxes and reasonable profits of refiners. The government official would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. Therefore, the pass-through of global oil prices to domestic fuel prices will now be bigger and faster than before. 6. Both broad money supply and RMB loans have witnessed sharp deceleration in growth Last year, the People s Bank of China (PBOC), China s central bank, adopted an extremely loose monetary policy, resulting in stunning growth in money supply and loans in Indeed, the monetary stimuli have greatly boosted China s economic growth, which rebounded all the way from 6.2% yoy in 1Q09 to 11.9% yoy in 1Q10. However, there are growing concerns over overheating of the economy, rising inflation, as well as the looming property bubble. In response, the central bank has started taking action to mop up excess liquidity from the market since early this year. The moves included banks reserve requirement ratio (RRR) hikes 10, implementation of monthly loan quotas, upward adjustments of interest rates of its newly-issued central banks bills, etc. Moreover, many commercial banks have tightened credits to new infrastructure projects, local-government financing vehicles and the property market, as well as to a number of sectors with overcapacity. (See exhibit 13) The above-mentioned measures, together with the high comparison base last year, caused both money supply and RMB loans to record sharp deceleration in growth. As of end-mar 2010, the broad money supply (M2) rose by 22.5% yoy, much slower than the 27.7% yoy growth registered as of end-dec The amount of total outstanding RMB loans increased by 21.8% as of end-mar 2010, compared to the 31.7% yoy growth as of end-dec Overall, banks increased their RMB lending by 2.6 trillion yuan in 1Q10, much lower than that in 1Q09 (4.6 trillion yuan). (See exhibit 11) At the 11 th National People's Congress (NPC) held in Mar 2010, China s policymakers declared that managing inflation expectations would be one of the major objectives of macroeconomic policies this year. In addition, they pledged to continue the moderately loose monetary policy, and further suggested that the broad money supply (M2) growth was targeted at around 17%; and the amount of new RMB loans was targeted at 7.5 trillion yuan (or a 18.8% yoy growth) in Nevertheless, it is noteworthy that such target growth rates of M2 and RMB loans are much lower than the actual growth recorded in 2009, implying that the government has planned to normalize the monetary policy this year. Looking ahead, we expect that the central bank will further raise RRR for a few times and begin to increase the benchmark interest rates later this year, in a bid to curb rising inflation. On the other hand, in order to cool down property prices, the State Council has already taken a series of tough measures, including raising minimum mortgage rates and minimum down-payment ratios on home purchases, since mid-april. Soon afterwards, many commercial banks have also suspended lending for the purchases of third home or more. It is widely believed that these policies will have big impacts on the property market, thereby lowering risk of asset bubbles. 10 Banks RRR was increased by 50 bps on 18 Jan 2010, the first rise since June Afterwards, the central bank further raised RRR by 50 bps on 25 Feb, and will hike the RRR again by 50 bps on 10 May. 12

13 Domestic and Foreign Exhibit 13: Broad money supply (M2) and RMB loans As of Broad money supply (M2) Total outstanding RMB loans amount (trillion yuan) yoy growth (%) Amount (trillion yuan) yoy growth (%) End-Apr % % End-May % % End-Jun % % End-Jul % % End-Aug % % End-Sep % % End-Oct % % End-Nov % % End-Dec % % End-Jan % % End-Feb % % End-Mar % % new RMB loans (trillion yuan) FY FY Apr May 0.7 Jun 1.5 Jul 0.4 Aug 0.4 Sep 0.5 Oct 0.3 Nov 0.3 Dec 0.4 Jan Feb 0.7 Mar 0.5 Source: People s Bank of China 13

14 Li & Fung China Trade Quarterly May 2010 Issue 18 Snapshot: 2010 Policy focuses and highlights In the 3 rd session of the 11 th National People s Congress (NPC), certain important documents, such as the Government Work Report, the Report on National Economic & Social Development, and the Central & Local Budgets, were discussed and approved. The 2010 Policy focuses are highlighted as follows: 1. Maintaining economic growth and expanding domestic demand, especially household consumption Ensuring stable and relatively fast economic growth, adjusting economic structure and managing inflation expectations are the major objectives of macroeconomic policies. The government will continue to carry out the proactive fiscal policy and the moderately loose monetary policy, while more efforts will be directed at enhancing the flexibility of policies in response to the latest situations. A proactive fiscal policy: A record fiscal deficit budget of 1,050 billion yuan for 2010, including a central budget deficit of 850 billion yuan and 200 billion yuan in local government bonds. Such an amount of budget deficit is still below the generally accepted warning line of 3% of GDP. A moderately loose monetary policy: The broad money supply (M2) growth is targeted at around 17%; and the amount of new RMB loans is targeted at 7.5 trillion yuan (or a 18.8% yoy growth) this year. The government will further improve the lending structure, through strengthening loan support to the major sectors, farmers, small- and medium-sized enterprises, while restricting loans to sectors with excess capacity, and energy-intensive and highly-polluting industries, and will make sure loans would be used to finance the real economy. The central government in 2010 will allocate billion yuan to public investment. More efforts would be channeled into improving the structure of fixed asset investment in the country. The launch of new projects will be tightly controlled. Funds will mainly be used to finance projects under construction. Ways to enhance household consumption include: (i) To increase households spending power, especially that of low- and middle-income earners, through raising farmers' income, basic pensions for enterprise retirees, subsistence allowances for both urban and rural residents. (ii) To promote upgrade of consumption structure through nurturing the development of consumption hotspots, in areas such as information services, tourism, cultural services, training, services for the elderly, and household services. To further boost consumer credit. To strengthen infrastructure for the commercial sector and also support the development of e-commerce. To strengthen market supervision. (iii) To continue and strengthen policies for encouraging consumption. To improve the rural subsidies scheme for home appliance purchases, through raising the price caps on subsidized products, covering more types of products. To enhance the old-fornew (trade-in) subsidies schemes for home appliance and automobile purchases, and the rural subsidy programme for motorcycle purchase. 14

15 Domestic and Foreign 2. Accelerating the change of development mode, and promoting the upgrade of economic structure To restructure and rejuvenate key industries. To nurture emerging industries such as new energy, new materials, energy conservation, environmental protection, biomedicine, information network, high-end manufacturing industries, etc. To speed up the development of the service sector, including finance, logistics, information, R&D, industrial design, commercial services, energy conservation and environmental protection services, public utilities, real estate and property management services, community services, etc. A total of 10.6 billion yuan will be allocated to support development of small- and medium-sized enterprises. The central government will allocate billion yuan for promoting science and technological development in 2010, up by 8% from the previous year. The government will raise the ratio of R&D spending to GDP to above 1.75%. To curb overcapacity in some sectors. To shut down backward production facilities in thermal power plants with a total capacity of 10 million kilowatts, steel mills with a total capacity of 6 million tons, iron foundries with a total capacity of 25 million tons, cement plants with a total capacity of 50 million tons, paper mills with a total capacity of 530,000 tons, and plate glass plants with a total production capacity of 6 million weight cases. To reduce the gap between urban and rural development. 3. Developing industrial system with low carbon emissions and promoting low-carbon consumption patterns The government will strengthen its efforts in developing low-carbon, new energy and renewable energy technologies, and promoting energy conservation technologies. Energy-saving capacity will be increased by 80 million tons of coal equivalent in To plant at least 5.92 million hectares of new forests in Enhancing environmental protection Water consumption per 10,000 yuan of value-added by industry is targeted to drop by 2.1%; while the percentage of industrial solid waste that are comprehensively utilized should reach 68.4% in 2010, up by 1.8 ppt. from the previous year. 15

16 Li & Fung China Trade Quarterly May 2010 Issue 18 The percentage of treated urban sewage is targeted to reach 75%; and percentage of urban household waste safely handled to reach 71% in Reforms in various areas are emphasized as a way to achieve breakthroughs in development bottlenecks and to generate momentum of scientific development. Continuous reforms in the following areas are mentioned: State-owned enterprises Pricing mechanism of resources & environmental charges Fiscal & taxation system Financial system Income distribution Social services agencies 6. Securing and improving people s livelihood, promoting social harmony The central government plans to spend billion yuan on the social security system this year, up 9.6% or 27.9 billion yuan from the previous year. The pilot programme of a new type of rural old-age insurance will be expanded to cover 23% of counties (cities) of the whole country. The number of urban residents participating in the basic old-age insurance program is expected to grow by 5 million. The basic old-age pension for enterprise retirees will rise by 10% per person this year. The central government will allocate 43.3 billion yuan to implement proactive policies to boost employment. In 2010, the subsidies on basic medical insurance for non-working urban residents and subsidies on the new type of rural cooperative medical care system will be raised to 120 yuan per person per year, up 50% yoy from the previous year. The gross enrollment ratio for senior high schools is expected to reach 80%. College enrollment will increase by 2.7% yoy to 6.57 million. Postgraduate enrollment will reach 534,000, up by 4.5% yoy. 7. Fostering stable and sound development of the property market To prevent the excessive rise in property prices in some cities. To increase land supply for building low and medium cost housing. The central government will allocate 63.2 billion yuan for providing housing for low-income families in 2010, an increase of 8.1 billion yuan over the previous year. 3 million housing units for low-income families will be built in

17 Domestic and Foreign 8. Income distribution reform To increase the share of household income in national income gradually. To boost labor income. To create conditions for more individuals to earn income from assets. The central government will provide direct subsidy of billion yuan to farmers in 2010, up by 6.04 billion from the previous year. The central government will push through the reform of urban household registration. The requirements for obtaining urban household registration in small and medium-sized cities, and towns will be relaxed. The government will also gradually allow migrant workers to receive the same treatment as urban residents in terms of labor income, children s education, healthcare, housing, and social security. III. Outlook 1. Major macroeconomic targets for 2010 The 3 rd session of the 11 th National People s Congress (NPC) was concluded in March A number of major macroeconomic targets for 2010 were announced. Of which, the GDP growth target for 2010 (8% ) should be easily exceeded, as China s GDP growth reached 11.9% yoy in 1Q10 and is unlikely to drop sharply for the rest of the year. (See exhibit 14) Exhibit 14: Main macroeconomic targets set for GDP growth of around 8% (vs. 8.7% actual in 2009). 2. Over 9 million new jobs for urban residents (vs.11 million actual in 2009); and registered unemployment rate of no more than 4.6% (vs. 4.3% actual in 2009). 3. CPI growth of around 3% (vs. -0.7% actual in 2009). 4. Fixed asset investment grows by 20% (vs. 30.1% actual in 2009). 5. Retail sales of consumer goods increase by 15% (vs. 15.5% actual in 2009). 6. Total imports and exports rises by 8% (vs % actual in 2009). 7. Both rural and urban households incomes maintain steady growth. Of which, the per capita net income of rural households rises by 6% in real terms (vs. 8.5% actual in 2009). 8. The number of rural people living below the poverty line should be reduced by more than 4.1 million (The rural population in poverty numbered million as of end-2009). Source: The Government Work Report delivered by Premier Wen Jiabao on 5 March

18 Li & Fung China Trade Quarterly May 2010 Issue CPI is expected to show mild growth in the coming months Price pressure has continued to rise in the previous few months, as shown by the accelerating growth rates of CPI, PPI and the purchasing price index of raw material, fuel and power. Looking ahead, the PPI, the index of ex-factory prices, will continue to be bolstered by improving domestic and export demand, rising raw material and energy prices, and labour costs in the near future. In particular, the recent upward trend of the input prices sub-index of China s manufacturing PMI suggests that production cost pressure has continued to build up, thereby putting inflationary pressure on midstream prices. It is thus expected that the PPI is likely to maintain strong growth in the near term. Exhibit 15 shows that the input prices sub-index is useful as a leading indicator of midstream prices. The input prices sub-index generally leads the PPI growth by about 2 to 4 months. Exhibit 15: Input prices sub-index of PMI and PPI, May Apr 2010 Source: China Federation of Logistics & Purchasing, National Bureau of Statistics, PRC China s CPI is mainly driven by food prices, as the price index of food weighs 33.2% in CPI accounting. Exhibit 16 shows the association between CPI and CPI: food. The National Development and Reform Commission (NDRC) predicts food prices to stay relatively stable, due to sufficient food supply. 11 In particular, pork prices had been on downward trend in early 2010, until the government started to buy pork for its frozen pork reserve recently. The recent drought in southwestern China is also unlikely to push up food prices, as the affected areas are not the major food-producing regions in China

19 Domestic and Foreign Still, with strengthening domestic demand, rising property and energy prices, the buildup of inflationary expectations, as well as the low comparison base last year, we expect the CPI to show mild growth in the coming months. Exhibit 16: CPI and CPI: food, Apr Mar 2010 Source: National Bureau of Statistics, PRC 3. Except the property sector, all sectors recorded higher ECIs in 1Q10 Entrepreneurs, in general, have become more optimistic about the prospects of their respective industries, as indicated by China s Entrepreneur Confidence Index (ECI). 12 The ECI increased from in 4Q09 to in 1Q10, the highest in eight quarters. In addition, except the property sector, all sectors surveyed recorded higher readings in 1Q10, compared with 4Q09. Of which, ECI of the social services sector soared by 15.2 points from the previous quarter, posting the biggest jump among all sectors surveyed. Again, ECI of the wholesale and retail sector remained higher than the national average. Among various regions, the ECI in the central region recorded the biggest qoq jump in 1Q10, reaching Meanwhile, ECIs in the eastern and the western regions also improved to and respectively. (See exhibit 17 & 18) Exhibit 17: Entrepreneur Confidence Index 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q Source: National Bureau of Statistics, PRC 12 China s Entrepreneur Confidence Index (ECI) ranges from 0 to 200. A reading above 100 indicates an expectation of improving economic situation; A reading below 100 indicates an expectation of worsening economic situation. 19

20 Li & Fung China Trade Quarterly May 2010 Issue 18 Exhibit 18: Entrepreneur Confidence Index: By sector 4Q09 1Q10 Compared with the previous quarter National Higher By sector Industry Higher - Mining Higher - Manufacturing Higher - Electricity, gas & water Higher Construction Higher Transportation, storage & post service Higher Wholesale & retail Higher Property Lower Social services Higher Information transmission, computer service Higher and software Hotel & catering Higher By region Eastern region Higher Central region Higher Western region Higher Source: National Bureau of Statistics, PRC 4. Growth momentum of China s manufacturing sector has remained strong China s manufacturing PMI 13 increased from 52.0 in February to 55.1 in March, and then edged up to 55.7 in April. Growth momentum of China s manufacturing sector has remained strong, supported by strengthening domestic and export demand. The headline PMI has already stayed above the expansionary 50-mark for fourteen consecutive months, showing that the economic recovery is on a firm footing. We believe the risk of an economic slowdown in 2H10 is low, although China s government has started to normalize its monetary policy since early 2010 and has taken tough measures to cool down the property sector since April. (See exhibit 19) The output index picked up from 54.3 in February to 58.4 in March, and further reached 59.1 in April, indicating that industrial production will keep up the robust growth in the next few months. 13 The CFLP China Manufacturing Purchasing Managers Index (PMI) provides an early indication each month of economic activities in the Chinese manufacturing sector. It is compiled by China Federation of Logistics & Purchasing (CFLP) and China Logistics Information Centre (CLIC), based on data collected by the National Bureau of Statistics (NBS). is responsible for drafting and disseminating the English PMI report. A PMI reading above 50 indicates an overall expansion in the manufacturing sector; below 50, an overall contraction. 20

21 Domestic and Foreign Supported by the continuous recovery of China s economy and the world economy, as well as restocking activities of foreign retailers, the new orders index went up from 53.7 in February to 58.1 in March, and further rose to 59.3 in April. 14 The new export orders index also climbed from 50.3 in February to 54.5 in both March and April, suggesting that China s export growth is likely to continue in the near term. Nevertheless, we are concerned about the impact of rising raw material prices on China s manufacturers. Input prices index increased from 61.1 in February to 65.1 in March, and then jumped to 72.6 in April, the highest in twenty-two months. Some enterprises would find it difficult to pass through the higher cost to buyers, leading to reduced profit margins. In response to the rises in new orders and prices of production inputs, most producers have piled up inventory of raw materials. The purchases of inputs index moved up from 51.9 in February to 58.1 in March, and further increased to 60.1 in April. The stocks of major inputs index improved from 48.1 in February to 50.6 in March, and then edged up to 51.5 in April. Exhibit 19: China manufacturing PMI at a glance, Apr 2010 Index s. Adj Index Index Compared with the Previous Month Direction PMI 55.7 Higher Expanding Output 59.1 Higher Expanding New Orders 59.3 Higher Expanding New Export Orders 54.5 Unchanged Expanding Backlogs of Orders 53.4 Higher Expanding Stocks of Finished Goods 46.2 Lower Contracting Purchases of Inputs 60.1 Higher Expanding Imports 53.1 Lower Expanding Input Prices 72.6 Higher Expanding Stocks of Major Inputs 51.5 Higher Expanding Employment 53.2 Higher Expanding Suppliers Delivery Time 51.1 Higher Quickening Source: 14 The new orders index covers both domestic orders and export orders. That is to say, the manufacturers are not asked to differentiate between domestic orders and export orders when filling in the questionnaires. 21

22 Li & Fung China Trade Quarterly May 2010 Issue 18 Part Two: Foreign Trade I. Recent development 1. China s export grew strongly by 28.7% yoy; import growth soared to 64.6% yoy in 1Q10 China s export growth improved from 17.7% yoy in Dec 2009 to 31.4% yoy in Jan-Feb 2010, before moderating to 24.3% yoy in March. (Note that the readings recorded in January and February were distorted by the different timing of the Chinese New Year in 2009 and 2010.) Overall, in 1Q10, China s export totaled US$ billion, up by 28.7% yoy. (See exhibit 20-22) The strong export growth was attributable to the restocking activities of foreign retailers, as well as the gradual recovery of the global economy. The low comparison base since the global financial crisis broke out in late 2008 also helps to explain the surge of yoy growth in recent months. On the other hand, China s import totaled US$ billion in 1Q10, reflecting the robust domestic demand. The import growth soared from 22.3% yoy in 4Q09 to 64.6% yoy in 1Q10, largely due to the massive increases in both volumes and prices of imported raw materials such as crude oil and plastics (in primary forms and rubber), the huge demand for automobile, as well as the low comparison base in 1Q09. With import growing faster than export, China s trade surplus continued to post negative growth of -76.7% yoy in 1Q10, deteriorating from -46.3% yoy in 4Q09. Overall, trade surplus was US$ 14.5 billion in 1Q10. Note that for the first time in seventy-one months, China recorded a trade deficit of US$ 7.2 billion in March, when China s import exceeded export. Exhibit 20: China s quarterly foreign trade data, 2Q09-1Q10 USD billion (yoy growth) export Import Trade Balance FY09 1,201.7 (-16.0%) 1,005.6 (-11.2%) (-34.2%) 2Q (-23.5%) (-19.9%) 33.9 (-41.8%) 3Q (-20.3%) (-11.9%) 38.8 (-53.4%) 4Q (0.2%) (22.3%) 61.4 (-46.3%) 1Q (28.7%) (64.6%) 14.5 (-76.7%) Source: China Customs 22

23 Domestic and Foreign Exhibit 21: China s monthly foreign trade data, Apr Mar 2010 USD billion (yoy growth) export Import Trade Balance Apr (-22.8%) 79.0 (-22.9%) 12.9 (-22.7%) May 88.7 (-26.5%) 75.7 (-24.9%) 13.0 (-35.6%) Jun 95.5 (-21.3%) 87.5 (-12.9%) 8.0 (-62.6%) Jul (-23.0%) 95.0 (-14.7%) 10.4 (-58.9%) Aug (-23.4%) 88.1 (-16.9%) 15.6 (-45.6%) Sep (-15.3%) (-3.5%) 12.8 (-56.3%) Oct (-13.8%) 86.8 (-6.4%) 23.9 (-32.1%) Nov (-1.2%) 94.6 (26.7%) 19.1 (-52.4%) Dec (17.7%) (55.9%) 18.4 (-52.8%) Jan (21.0%) 95.3 (85.5%) 14.2 (-63.8%) Feb 94.5 (45.7%) 86.9 (44.7%) 7.6 (58.4%) Mar (24.3%) (66.0%) -7.2 (-139.6%) Source: China Customs Exhibit 22: Growth rates of export and import, Apr Mar 2010 Source: China Customs 23

24 Li & Fung China Trade Quarterly May 2010 Issue 18 Exhibit 23: Export by category, 2009 & 1Q10 yoy growth (%) of export value, calculated in US$ Q10 Textile materials & products Garments & clothing accessories Footwear Toys Coal Crude oil Refined oil Steel Mechanical & electrical products Source: China Customs Exhibit 24: Import by category, 2009 & 1Q10 yoy growth (%) of import value, calculated in US$ Q10 Cereal & cereal flour Soybean Iron ore Crude oil Refined oil Steel Synthetic yarn (1000 tons) Vehicles and related parts (1000 units) Source: China Customs Exhibit 25: Foreign trade of China (general & processing trade), Q10 Yoy growth (%) share (%) Item FY09 4Q09 1Q10 FY09 4Q09 1Q10 Exports Of which: General Trade Processing Trade Imports Of which: General Trade Processing Trade Total of Imports and Exports Of which: General Trade Processing Trade

25 Domestic and Foreign 2. General trade grew faster than processing trade in 1Q10 In 1Q10, the growth rate of the trade value under general trade 15 rose to 47.9% yoy, faster than that of processing trade (38.4% yoy). China s import under general trade grew sharply by 72.2% yoy in 1Q10, driven by the robust domestic demand for commodities. Besides, export under general trade expanded by 26.6% yoy in 1Q10, significantly improving from the negative growth rate of -6.5% yoy in 4Q09. Consequently, the share of general trade in China s total trade value increased to 50.1% in 1Q10, compared to 46.8% in 4Q09. (See exhibit 25) On the other hand, processing trade 16 accounted for 38.9% of the total trade value in 1Q10, down from 42.6% in 4Q09. Particularly noteworthy is that China s import under processing trade recorded impressive growth of 56.3% yoy in 1Q10, suggesting a promising prospect for export under processing trade in the near term. 3. China s trade with its major trading partners showed strong growth in 1Q10 China s trade with its major trading partners showed strong growth in 1Q10. Same as in FY09, the European Union (EU) was China s biggest trading partner in 1Q10, accounting for 16.4% of China s total foreign trade. The Sino-EU trade amounted to US$ billion in 1Q10, increasing by 35.1% yoy, compared to the negative growth of -14.5% yoy in FY09. (See exhibit 26 & 27) Contrary to the case in FY09, China s export to the EU rose much more than its export to the US and Japan in 1Q10, suggesting relatively fast recovery of demand from the EU. Export to the EU grew by 31.0% yoy, whilst export to the US and Japan gained 19.7% yoy and 17.7% yoy respectively in 1Q10. The US remained China s second largest trading partner in 1Q10. The Sino-US trade rose by 25.8% yoy to US$ 78.1 billion in 1Q10, compared to the negative growth of -10.6% yoy in FY09. Japan was the third largest trading partner of China in 1Q10. The Sino-Japan trade grew by 38.2% yoy to US$ 63.6 billion in 1Q10, accounting for 10.3% of China s total foreign trade. Boosted by the establishment of the ASEAN-China Free Trade Area (ACFTA) 17 since 1 Jan 2010, China s trade with the Association of South East Asian Nations (ASEAN) registered a stunning growth of 61.3% yoy in 1Q10, compared to -7.9% yoy in FY09. As a result, the Sino-ASEAN trade has gained weight its share in China s total foreign trade rose from 9.7% in FY09 to 10.2% in 1Q10. Looking forward, if this upward trend continues, the ASEAN will overtake Japan to become China s third largest trading partner very soon. 15 General trade refers to the import or export of goods by enterprises in China with import-export rights. According to the Chinese statistics, the scope of general trade covers: import and export using loans or aids; the import of materials by foreign invested enterprises (FIEs) for processing of goods for sale in the domestic market; the export of goods purchased by FIEs or manufactured by processing domestically-produced materials; the import of food and beverages by restaurants and hotels; the supply of domesticallyproduced fuel, materials, parts and components to foreign vessels or aircraft; the import of goods as payment in kind in lieu of wages in labour service cooperation projects with foreign countries; and the export of equipment and materials by enterprises in China for their investment abroad. 16 Processing trade refers to the business activity of importing all or part of the raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad, and re-exporting the finished products after processing or assembling by enterprises within the Chinese Mainland. 17 Detailed discussion can be found in our Li & Fung Trade Quarterly, Issue