CHINA BIWEEKLY. Internet penetration rate 60% in June 2018: 98% of 800Mn internet users access via mobile

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1 CHINA BIWEEKLY RMB Internationalization Business Promotion Office Global Business Division September 28th 2018 BIWEEKLY DIGEST [Economy] Manufacturing PMI for August rises to 51.3, up 0.1 point month-on-month NDRC report: Economic management in 2H FY2018 requires greater efforts to achieve targets August 2018: CPI rises by 2.3%, PPI by 4.1% year-on-year () VAT refund rates for exports raised for 397 items [Industry] Internet penetration rate 60% in June 2018: 98% of 800Mn internet users access via mobile [Trade/Investment] Five years since launching the Belt and Road Initiative: Achievements thus far Trade statistics for August: Record-high trade surplus with the U.S. [Finance/Exchange] Foreign reserves in August: First decrease in three months Disclaimer This document does not constitute any entrustment or any other contractual obligations. MUFG Bank (China) (the Bank) shall not be responsible for any legal consequences hereof. Although this document is based on reliable data, the Bank does not guarantee its accuracy or completeness. The contents herein are limited to our current understanding. The Bank shall not be responsible for any losses or damages related to this document. Please consult your lawyers, tax consultants, accountants or other specialists for their professional advices, as appropriate. This document is the copyright of the Bank and is protected by the law. No partial or entire part of this document may be quoted, duplicated, or forwarded without the Bank s permission. Copyright 2018 All rights reserved. 1

2 [Economy] Manufacturing PMI for August rises to 51.3, up 0.1 point month-on-month On August 31, the National Bureau of Statistics (NBS) and the China Federation of Logistics & Purchasing (CFLP) announced that the August manufacturing PMI was 51.3, up 0.1 point month-on-month (MoM). The index surpassed 50 points, which is the turning point in judging the economy, for the 25th consecutive month. (Fig. 1) The NBS commented that the PMIs have been expanding overall year-to-date aside from Chinese New Year, ranging between 51 and 52, although they indicated that the ongoing trade dispute and external uncertainties are affecting import and export. Looking at the manufacturing PMI by component, production increased 0.3 point MoM to 53.3, while both domestic and external demand declined from the previous month: new orders dropped 0.1 point MoM to 52.2, new export orders fell 0.4 point MoM to 49.4, and imports fell 0.5 point MoM to (Fig. 2) Meanwhile, Expected Production and Business Activities, which indicates future business confidence, rose 0.4 point MoM to Non-manufacturing PMI for August rose MoM for the first time in the last two months, up 0.2 point to The composite PMI, an index derived from a weighted average of the manufacturing and non-manufacturing PMIs that monitors the overall economy s current status, rose 0.2 point MoM to 53.8 for August Manufacturing PMI [Fig. 2] Trends in Major Components of the Manufacturing PMI Production New Orders New Export Orders Raw Materials Price Imports Employment Expected Production and Business Activities Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Source: Created based on data released by the NBS and the CFLP Note: Historical data for Expected Production and Business Activities has been revised, as the calculation method was changed in January

3 NDRC report: Economic management in 2H FY2018 requires greater effort to achieve targets The National Development and Reform Commission (NDRC) reported on the status of the National Economic and Social Development Plan for the first half of 2018 at the Standing Committee of the National People s Congress held on August 28. The NDRC report commented that China s economy showed stability with an upward tendency during the period in question, as the indices for economic growth, employment, prices, international trade balance, etc. were fluctuating within reasonable ranges, in addition to improvements having been seen in indices related to the quality of development such as fiscal revenue, environmental protection, people s livelihoods, social security, etc. Meanwhile, the report indicated that changes in external circumstances together with long-term structural inconsistencies in the country are making it even more difficult to sustain sound and stable economic growth, commenting that even further efforts will be required to achieve the annual goals for 2018, notably in consumption, total social financing, and per capita disposable income. In conjunction with the report on the first half of 2018, the NDRC announced that its economic policies for the second half of this year will further expand reforms and opening-up, take thorough preventive measures against serious risks, implement pollution control measures, and expand domestic demand by proactive actions, along with implementing measures aimed at solving the country s structural challenges. Major focuses include the following: Major Economic Policies for 2H FY2018 (from the State Council report on the year-to-date implementation status of the National Economic and Social Development Plan) Proactive financial policies Thoroughly implement measures to reduce taxes and cost burden Moderate monetary policies Effectively expanding demand Promoting structural reforms on the supplier side Reducing serious risks Enhancing openingup Ensuring the livelihoods of the Chinese people Maintain sufficient liquidity, invest in real economy (in particular, resolve the financial difficulties facing micro enterprises) Secure funds for ongoing projects related to private industry, promote private investment Open up and expand service consumption Reinforce the areas where the infrastructure is vulnerable, promote technological innovation Promote deleveraging, reduce the risk of local governments' hidden debts, curb increases in housing prices Move forward with the BRI, increase imports, hold an imports exhibition, protect the interests of foreign companies Continue restructuring income distribution, enhance public resources allocation to remote/poor regions Source: Created based on the State Council report on the year-to-date implementation status of the National Economic and Social Development Plan 3

4 August 2018: CPI rises by 2.3%, PPI by 4.1% The National Bureau of Statistics (NBS) of China announced on September 10 that the August consumer price index (CPI) had risen by 2.3%, 0.2 percentage point higher than the previous month and the third consecutive month of increase. In the meantime, the August producer price index (PPI) increased by 4.1%, 0.5 percentage point lower than the previous month, resulting in the second consecutive month of decline. When taking a closer look at CPI by category, food was up by 1.7% (1.2 points higher than the previous month) and non-food by 2.5% (0.1 point higher than the previous month). In food, mutton and eggs showed a high growth rate, recording increases of 13.3% (July: up 13.3% ) and 10.3% (July: +12.7% ) respectively. Pork s CPI decreased by 4.9% (July: down 9.6% ), slowing its rate of decline. As for non-food, light oil increased by 22.0% (July: up 25.1% ) and gasoline by 19.8% (July: up 22.7% ), both continuing to have a strong impact on the total CPI. Examining PPI results by industry, oil/natural gas drilling rose by 39.6% (July: up 42.1% ), oil/coal/other fuel processing by 22.7% (July: up 24.6% ) and steel refining/metallic rolling by 9.5% (July: up 12.3% ). Although growth in each industry was lower than July, growth rates remain high. VAT refund rates for exports raised for 397 items China s Ministry of Finance announced on September 7 that it would raise the VAT (value-added tax) refund rates for exports* for 397 items including electronic devices (Caishui [2018] No. 93). The new rates will take effect on September 15. They are seen as a support measure for exporters that will be impacted by trade friction with the United States. *When a business exports cargo from China, the VAT (equivalent to consumption tax in Japan) imposed at purchase will be refunded according to the refund rate set forth for each product. The refund rates will be 16%, 13% or 9% after the rates are raised for the 397 items. The 16% refund rate applies to: integrated circuits (currently 15%), non-electromagnetic noise filters (currently 15%), books (currently 13%), newspapers (currently 13%), fuel cells (currently 15%), LED light bulbs (currently 13%), etc. The 13% refund rate applies to: bamboo crafts (currently 9%), wooden fans (currently 9%), etc. The 9% refund rate applies to: basalt fiber and products made of it (currently 0%), safety pins (currently 5%), screws (currently 5%), safes (currently 5%), etc. Please see the URL below for a list of the 397 items and the refund rates. [Industry] Internet penetration rate 60% in June 2018: 98% of 800Mn internet users access via mobile On August 20, the China Internet Network Information Center (CNNIC) released its 42nd statistical report on internet development in China. According to the report, the number of internet users in China as of the end of June 2018 compared to the end of the previous year rose by million to 802 million, with the internet penetration rate rising 1.9 percentage points to 57.7% accordingly (Fig. 1). During this period, users accessing the internet via mobile devices increased by million to 788 million, accounting for 98.3% of the whole. 4

5 Instant messaging took the largest share for application programs used, with million users or 94.3% of all users (Fig. 2). In terms of application program growth rate, asset management apps rose most significantly, increasing 30.9% from the end of 2017 to million users. Meanwhile, growth in bike sharing and delivery service apps tapered off from the previous year s leaps. Bike sharing rose 11.0% (the second half of 2017: up 108.0%)* and delivery services rose 6.0% (growth throughout 2017: up 64.6%) (Fig. 2). * Calculated by MUFG Bank based on data released by the CNNIC There were significant increases in the number of mobile users of education-related apps, up 19.6% (to million users) and of online games, up 12.6% (to million users). Shopping via mobile devices maintained a two-digit growth rate, up 10.2% from the end of the previous year, while the total usage of online shopping rose 6.7% during the same period. The CNNIC indicated that online shopping users are becoming further divided into two sub-groups, one being higher-income young people in big cities who are more concerned with quality and experiential consumption, and the other value-oriented middle-aged and older people in medium to small cities who engage in group purchasing (a way to get discounts by buying in bulk with other users). Instant Messaging Online News Online Shopping Online Payment Online Games Online Banking Asset Management Delivery Services Educational Services Taxis Ride-sharing Services (excl. Taxis) Live Streaming [Fig. 2] Internet User Trends by Application Program Upper Box: Total Access / Lower Box: Access via Mobile Total users 772Mn Mobile users 753Mn December 2017 June 2018 Ratio of users to the total Total users 802Mn Mobile users 788Mn 720Mn 93.3% 8.1% 756Mn 94.3% 4.9% 694Mn 92.2% 8.7% 750Mn 95.2% 8.1% 647Mn 83.8% 5.4% 663Mn 82.7% 2.5% 620Mn 82.3% 8.5% 631Mn 80.1% 1.9% 533Mn 69.1% 14.3% 569Mn 71.0% 6.7% 506Mn 67.2% 14.7% 557Mn 70.7% 10.2% 531Mn 68.8% 11.9% 569Mn 71.0% 7.1% 527Mn 70.0% 12.3% 566Mn 71.9% 7.4% 442Mn 57.2% 5.9% 486Mn 60.6% 9.9% 407Mn 54.1% 15.8% 458Mn 58.2% 12.6% 399Mn 51.7% 9.2% 417Mn 52.0% 4.5% 370Mn 49.2% 11.0% 382Mn 48.5% 3.3% 129Mn 16.7% 30.2% 169Mn 21.0% 30.9% 343Mn 44.5% 64.6% 364Mn 45.4% 6.0% 322Mn 42.8% 66.2% 344Mn 43.6% 6.6% 155Mn 20.1% 12.7% 172Mn 21.4% 10.7% 119Mn 15.8% 21.3% 142Mn 18.1% 19.6% 286Mn 37.1% 27.5% 346Mn 43.2% 20.8% 236Mn 30.6% 40.6% 299Mn 37.3% 26.5% 422Mn 54.7% 22.6% 425Mn 53.0% 0.7% 221Mn 28.6% - 245Mn 30.6% 11.0% Bike Sharing Source: Created based on data released by the CNNIC Note: A user is defined as a person who used the service at least once in six months Ratio of users to the total 5

6 [Trade/Investment] Five years since launching the Belt and Road Initiative: Achievements thus far The State Council held a joint press conference on August 27 with relevant departments to present the status and outlook of the Belt and Road Initiative (BRI) in commemoration of the fifth anniversary of its launch (Fig. 1). In 2013, Chairman Xi Jinping proposed a growth strategy called One Belt, One Road, consisting of two new economic zones: One Belt, the Silk Road Economic Belt from China to Europe via Central Asia and Russia, and One Road, the 21st Century Maritime Silk Road from the South China Sea to Europe via the Indian Ocean and the Mediterranean. Deputy Director of the National Development and Reform Commission Ning Jizhe commented at the conference that the BRI has made significant progress in the past five years, while indicating the need to recognize the challenges facing the development of the BRI and the investment and overseas business of Chinese companies. These challenges are the result of uncertainties in the global economy, a changing international environment, and skepticism toward the BRI itself. He also stated that China will advance BRI development further by objectively and rationally determining the initiative s achievements and challenges and making continuous attempts to improve the framework for international cooperation. 6

7 [Fig. 1] Building the Belt and Road: Achievements in the Past Five Years Coordinated Strategy Nov 8, The Silk Road Fund established (USD 40 billion, utilized for investments and loans for Belt and Road Initiative-related projects) Mar 28, "Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road" announced Dec 25, The Asian Infrastructure Investment Bank (AIIB) established May 14-15, st Belt and Road Forum for International Cooperation held in Beijing - Connecting to other development plans in Belt-and-Road countries/regions* * i.e. Russia-led Eurasian Economic Union, the Master Plan on ASEAN Connectivity (MPAC) 2025, Saudi Vision 2030, etc. Trade and Investment - Signed 118 cooperation agreements relevant to the Belt and Road Initiative (BRI) with 103 countries/international organizations - Over USD 5 trillion in cargo trade with BRI countries (5-year cumulative amount) - Over USD 70 billion in Chinese investment in BRI countries (5-year cumulative amount) Infrastructure Construction Aug 26, The number of China Railway Express international freight trains between China and Europe exceeded 10 thousand. The trains provide connections to 43 cities in 15 European countries - Construction of Gwadar Port in Pakistan completed - Steady progress in China-Thailand, China-Laos, and Hungary-Serbia railroad construction Financial Cooperation and Legal Support - Agreements made with 17 countries on the Guiding Principles on Financing the Development of the Belt and Road - 11 Chinese banks have established 71 large-scale offices in BRI countries - Preparations are under way to develop a settlement framework/institution for international economic disputes Source: Created based on State Council press conferences and xinhuanet.com Trade statistics for August: Record-high trade surplus with the U.S. According to the preliminary trade statistics (in USD) for August released by the General Administration of Customs on September 8, China s exports increased by 9.8% to USD billion year-on-year () and its imports increased by 20.0% to USD billion. The growth rate slowed down from July for both exports and imports. China also recorded a slightly smaller trade surplus than last month, posting a total of USD billion (Figures 1 and 2). For the period from January to August 2018, there was a 12.2% increase in exports at USD trillion and a 20.9% increase in imports at USD trillion. The cumulative trade surplus was USD billion, a larger surplus than the one recorded for the period from January through July (Figure 1). [Fig. 1] Trade Statistics for August 2018 August 2018 (July 2018 results in parentheses) Amount (USD Bn) Exports (215.57) + 9.8% (+12.2%) Imports (187.52) +20.0% (+27.3%) Trade surplus (28.05) - Jan-Aug 2018 (Jan-Jul 2018 results in parentheses) Amount Exports 1, (1,387.16) +12.2% (+12.6%) Imports 1, (1,221.06) +20.9% (+21.0%) Trade surplus (166.10) - Source: Created based on data released by GACC 7

8 Looking at more specific export and import data by product for the period from January to August 2018, significant increases were shown in the export of integrated circuits, up by 26.6%, and automobiles (including chassis), up by 25.4%, while exports of apparel were down 0.3% and shoes 3.9%. In imports, natural gas showed a dramatic increase of 64.7% and crude oil soared by 43.1%, while waste plastic, paper, and scrap metal fell by 27.2%. Meanwhile, export of soybeans rose slightly by 1.6%, but imports dropped off by 2.1%. In its trade with the United States in August, China showed a 13.2%* increase in imports with USD billion and a 2.7%* increase in exports at USD billion. Growth in imports has significantly slowed down, as the growth rate in July was 11.1%. The country recorded its highest trade surplus with the U.S. for a single month at USD billion. From January to August 2018, exports increased by 13.4% and imports increased by 11.1%, maintaining double-digit growth in both. China recorded a USD billion cumulative trade surplus with the U.S., which was an increase of 14.6%* from the USD billion* posted for the same period last year (Figure 3). When it comes to its trade with Japan from January to August 2018, China recorded an 8.0% increase in exports (January-July: up 8.6% ) and a 13.9% increase in imports (January-July: up 14.5% ), both of which showed reduced growth from the month before (Figure 4). It increased its trade deficit with Japan by 46.9%* to USD billion,* from USD billion* for the same period last year. *Figures calculated by MUFG Bank based on the data released by the General Administration of Customs. [Fig. 3] Statistics for Trade with U.S. in Aug (USD Bn) August 2018 (July 2018 results in parentheses) Amount Exports to U.S (41.54) +13.2% (+11.2%) Imports from U.S. Trade surplus with U.S (13.45) +2.7% (+11.1%) (28.09) 18.40% Jan-Aug 2018 (Jan-Jul 2018 results in parentheses) Amount [Finance/Exchange] Foreign reserves in August: First decrease in three months Exports to U.S (259.10) +13.4% (+13.3%) Imports from U.S. Trade surplus with U.S (97.47) +11.1% (+11.8%) (168.06) 14.60% Source: Created based on data released by GACC Note: Trade surplus amounts and growth rates are calculated by MUFG Bank. On September 7, the People s Bank of China (PBoC) announced that the country s foreign reserves in August fell slightly, dropping month-on-month (MoM) by USD 8.33 billion to USD trillion. This was the first such decrease in three months. The State Administration of Foreign Exchange (SAFE) stated that the minor decrease in foreign reserves in August had been caused by global trade friction, growing geopolitical risks, the rising US dollar and other factors. [Fig. 4] Jan-Aug 2018 Import and Export Amounts and Growth Rates by Country/Region (USD Bn) Country/Region Exports Imports Total U.S % % % Japan % % % South Korea % % % Hong Kong % % % Taiwan % % % Germany % % % Australia % % % Vietnam % % % Brazil % % % Malaysia % % % Note: Top 10 countries or regions for the total of export and import amounts Source: Created based on data released by GACC 8