CHINA BIWEEKLY. January-September cross-border RMB settlements New RMB loans for September increase by RMB billion YoY

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1 CHINA BIWEEKLY RMB Internationalization Business Promotion Office Global Business Division November 12th 2018 BIWEEKLY DIGEST [Economy] GDP growth rate for Q3 slows to 6.5% Half of the EU subsidiaries in China affected by the U.S.-China trade conflict Japanese companies have raised expectations for economic results generated by Prime Minister Abe s visit to China Opening of the Hong Kong Zhuhai Macao Bridge connecting Hong Kong, Zhuhai and Macao [Industry] September auto sales fall 11.6% year-on-year (YoY), new energy vehicle sales jump 54.8% Housing prices in September for 70 large- and medium-sized cities: 64 cities with month-on-month (MoM) growth [Trade/Investment] Hainan free trade pilot zone approved to focus on the medical and tourism sectors Inward foreign direct investment for September rises 8.3% year-on-year (YoY) while outward drops 15.0% [Finance/Exchange] January-September cross-border RMB settlements New RMB loans for September increase by RMB billion YoY 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 1[Economy] GDP growth rate for Q3 slows to 6.5% On October 19, the National Bureau of Statistics (NBS) announced its major economic indicators for September. The GDP growth rate in the third quarter of 2018 fell 0.2 percentage point from the previous quarter to 6.5%, the lowest level since 1Q FY2009, when the GDP growth rate temporarily dropped to 6.4% due to the impact of the Lehman crisis (Fig. 1). While NBS recognized that downward risk is increasing because of growing uncertainty inside and outside the country, it said the growth rate is within the scope of the annual target set out by the government (around 6.5%) and confirmed that the Chinese economy is continuing to grow steadily and reasonably. Looking at recent trends in the main economic indicators, cumulative investment in fixed assets for January-September rose 5.4% year-on-year (YoY), up 0.1 percentage point compared to January-August, and total retail sales of consumer for September went up 9.2% YoY, 0.2 percentage point higher than August. While investment and consumption have made a recovery, industrial production (value-added basis) for September went down 0.3 percentage point from August, dropping to 5.8% growth YoY (Figs. 2, 5, 6, and 7). Investment in fixed assets increased YoY for the first time this year. NBS believes the growth is resulting from investment in manufacturing improving for the sixth consecutive month to rebound to 8.7% YoY and investment in real estate continuing to grow to around 10% YoY. Meanwhile, NBS emphasized that growth in infrastructure investment, which dropped to 3.3% from double-digit growth in the beginning of the year, is expected to recover supported by a governmental policy on infrastructure investment (Fig. 3). Item Gross Domestic Product (GDP)* Investment in fixed assets (excl. [Fig. 2] Main Economic Indicators for September August 2018 September 2018 Amount YoY (%) Amount YoY (%) (April-June) 6.7 (July-September) 6.5 investments by rural companies)* (RMB Bn) 41, (RMB Bn) 48, State-owned sector (RMB Bn) (Unreleased) 1.1 (RMB Bn) (Unreleased) 1.2 Private sector (RMB Bn) 25, (RMB Bn) 30, Type of Primary (RMB Bn) 1, (RMB Bn) 1, Industry Secondar (RMB Bn) 15, (RMB Bn) 18, Tertiary (RMB Bn) 24, (RMB Bn) 28, Value-added industrial Total retail sales of consumer (RMB Bn) 3, (RMB Bn) 3, Consumer price index (CPI) Industrial producer price index Industrial producer purchase price Exports (USD Bn) (USD Bn) Imports (USD Bn) (USD Bn) Trade (USD Bn) (USD Bn) Inward foreign direct investment (actual basis) (USD Bn) (USD Bn) * Cumulative total since January 2018 ** Independently-accounted state-run companies and non-state-run companies with annual sales of RMB 20 million or more Source: Created based on data released by the NBS [Fig. 3] 2018 Growth in Fixed Asset Investment by Category Item Jan-Feb Jan-March Jan-April Jan-May Jan-June Jan-July Jan-Aug Jan-Sept Fixed asset investment 7.9% 7.5% 7.0% 6.1% 6.0% 5.5% 5.3% 5.4% Infrastructure 16.1% 13.0% 12.4% 9.4% 7.3% 5.7% 4.2% 3.3% Manufacturing 4.3% 3.8% 4.8% 5.2% 6.8% 7.3% 7.5% 8.7% Real estate 9.9% 10.4% 10.3% 10.2% 9.7% 10.2% 10.1% 9.9% Source: Created based on data released by the NBS 1 2

3 When looking at price indexes, the overall consumer price index (CPI) for September increased 2.5% YoY, up 0.2 percentage point from August. The overall producer price index (PPI) for September rose 3.6%, which was 0.5 percentage point lower than August. CPI rose for the fourth consecutive month, and higher food prices were conspicuous, with a 14.6% increase YoY for vegetables and a 10.2% increase for fruit, caused by bad weather such as typhoons (Fig. 4). NBS said the government will manage the Chinese economy s downward risk associated with the U.S.-China trade conflict through stable economic administration based on the six policies for economic stabilization, which emphasize employment, finance, trade, attracting foreign investment, other investment, and market expectations. (%) [Fig. 5] Growth in Fixed Asset Investment Fixed asset investment Private sector investment Note: Cumulative total from the start of the year Source: Created based on data released by NBS (%) [Fig. 6] Growth in Industrial Production Note: Cumulative total of January and February used for February data Source: Created based on data released by NBS Half of the EU subsidiaries in China affected negatively by the U.S.-China trade conflict On September 13, the European Union Chamber of Commerce in China announced the results of a survey conducted with member companies on the impact of the trade conflict between the U.S. and China (193 valid responses as of September 3). About half of the EU companies responded that they will be affected negatively as a result of the additional tariffs imposed by the U.S. and China. The impact of the U.S. sanctions and tariffs on China was described as negative for 53.9% of the respondents and neutral for 42.9%. Similarly, the impact of the Chinese retaliatory tariff measures on the U.S. was said to be negative for 42.9% of the respondents and neutral for 53.9%. In other words, the proportion of companies responding that the impact on their business would be negative or neutral was roughly half-and-half (Figs. 1 and 2). According to the EU Chamber of Commerce s analysis, while European companies will be significantly affected by the U.S.-China trade conflict, many companies have already established business models where both procurement and sales take place in China, or ones in which procurement for sales in China takes place outside China and the U.S. (%) [Fig. 7] Growth in Retail Sales of Consumer Goods Note: Cumulative total of January and February used for February data Source: Created based on data released by NBS

4 In reaction to the U.S-China trade conflict, most companies responded they will monitor the situation (72.5%). On the other hand, over 20% of the companies said they will suspend investment and business expansion. Following the survey, the EU Chamber of Commerce expressed concern about a greater than initially anticipated decrease in trade volume, deterioration of employment conditions, delays in manufacturing upgrades, and an economic downturn resulting from suspension of businesses (Fig. 3). Japanese companies have raised expectations for economic results generated by Prime Minister Abe s visit to China Prime Minister Shinzo Abe paid an official visit to China from October 25 to 27 to attend a reception commemorating the 40th anniversary of the conclusion of the Treaty of Peace and Friendship between Japan and China and a summit meeting with Chinese President Xi Jinping on October 26. It has been seven years since a Japanese Prime Minster paid an official visit to China. This official visit included the first China-Japan Third-Party Market Cooperation Forum, where 52 memorandums of understanding were signed between government agencies, companies and economic organizations in Japan and China. Prime Minister Abe also announced that the Japanese government would cease its official development assistance (ODA) for China this year, which had been provided since 1979, and proposed a new cooperative framework to discuss future support for development in third countries. Besides the above, there were 12 other international agreements and memorandums signed by the prime minister and the president. The international agreements cover financial cooperation and innovation, such as the resumption of a bilateral currency swap agreement and the establishment of an RMB clearing bank, and industrial cooperation including elderly care services. There is a growing expectation among Japanese companies that the agreements will further promote economic cooperation between Japan and China and create new business opportunities for them. See below for the major points of the economic cooperation agreements signed between Japan and China. 4

5 CHINA BIWEEKLY(November 12 th 2018) <Memorandums of China-Japan cooperation in the third-party market> The total of 52 memorandums cover a wide range of sectors including infrastructure, urban development, energy, medical/health care, finance/insurance, and automobile. The memorandums include a Japan-China-Thailand joint construction project for Amata Smart City. * The 52 memorandums of cooperation are listed on the official websites of the Ministry of Economy, Trade and Industry (METI) and the Ministry of Commerce of the People's Republic of China (MOFCOM). METI (in Japanese): MOFCOM (in Chinese): <Other memorandums of China-Japan cooperation> [Finance] Japan-China currency swap agreement: The Bank of Japan can withdraw up to RMB 200 billion and the People s Bank of China up to JPY 3.4 trillion. The three-year agreement is valid until October 25, 2021 and can be extended by mutual agreement. Although a Japan-China currency swap agreement was concluded in March 2002, it was allowed to expire in September 2013 due to deteriorating relations between Japan and China. Establishment of an RMB clearing bank: Bank of China s Tokyo branch was designated as an RMB clearing bank. [Innovation] Launch of bilateral innovation dialogue: Vice-ministerial-level talks will be held on a regular basis, alternating between countries, under the umbrella of the Japan-China High-Level Economic Dialogue and based on the newly created inter-ministry bilateral dialogue to promote cooperation on innovation. The dialogue will promote innovation-related policy sharing and the building of human and inter-business networks and cooperation, and will serve to strengthen cooperation on intellectual property. [Healthcare] Action plan for cooperation on elderly care services (2018 through 2022): Promote cooperation in the health and longevity sector for four years. Manage the elderly care services system and policies, improve the services rendered, cultivate professional care givers and build an enhanced information system. * The details of the signed MOUs are posted on the official website of the Ministry of Foreign Affairs of Japan (MOFA). Opening of the Hong Kong Zhuhai Macao Bridge connecting Hong Kong, Zhuhai and Macao The Hong Kong Zhuhai Macao Bridge, connecting the cities of Hong Kong, Zhuhai in Guangdong province, and Macao, was opened on October 24. A commemorative ceremony was held in Zhuhai the day before on October 23, joined by President Xi Jinping who announced its opening. It has taken 16 years since the government of Hong Kong made the proposal to build a bridge to the central government in 2002 and has reportedly cost a total of RMB billion. The Hong Kong Zhuhai Macao Bridge forms a core part of the infrastructure of the Guangdong-Hong Kong-Macao Greater Bay Area initiative, which aims to develop an integrated Canton, Hong Kong and Macao city cluster. It reduces the travel time between Hong Kong and Zhuhai from four hours over land to approximately 45 minutes and the travel time between Hong Kong and Macao that takes over an hour by ferry to 30 minutes or so. The total length of the bridge is 55 kilometers, including 29.6 kilometers which is over or under the sea (a 22.9-km bridge and 6.7-km undersea tunnel), the 12-kilometer Hong Kong Link Road, and the 13.4-kilometer Zhuhai Link Road. The bridge has a total of six lanes with three lanes going in each 5 Taishan <Hong Kong Zhuhai Macao Bridge Area Map> Guangzhou Nanhai Foshan District Panyu District Shunde Jiangmen District Zhongshan Source: All China Info Dongguan Zhuhai Macao Zengcheng District Shenzhen Boluo County Hong Kong Huizhou Huiyang District

6 direction, and on the Main Bridge, drivers must drive on the right as is required in mainland China (Hong Kong and Macao are left-hand traffic areas). The bridge can be accessed 24 hours a day by cross-border buses, shuttle buses, taxies, freight transport vehicles, and private cars. Shuttle buses that connect the ports of entry are expected to become a major means of transportation for passengers. They reportedly run every five minutes during peak hours, every 10 to 15 minutes during non-peak hours and every 15 to 30 minutes late at night. Tolls of RMB 200 to 300 are charged for buses, 60 for ordinary trucks, 115 for container trucks, and 150 for cars. On October 28, the first Sunday after it opened, the Hong Kong Zhuhai Macao Bridge was reportedly used by a total of approximately 3,000 vehicles and 78,000 people. The Chinese government regards the construction of the Greater Bay Area as a vital national strategy and is trying to make Hong Kong and Macao driving forces for the country s development. Opened after the unveiling of the Guangzhou-Shenzhen-Hong Kong Express Rail Link connecting Guangzhou and Hong Kong in September, the Hong Kong Zhuhai Macao Bridge is expected to further promote the movement of people, goods and capital and technological cooperation within the Greater Bay Area. The development of the Greater Bay Area is also expected to lead the development of the whole country, making the most of one country, two systems. [Industry] September auto sales fall 11.6% year-on-year (YoY), new energy vehicle sales jump 54.8% According to an announcement made by the China Association of Automobile Manufacturers (CAAM) on October 12, September auto sales fell 11.6% YoY to million units, marking a YoY decrease for the third consecutive month (Fig. 1). This is even lower than the two-digit negative growth recorded in February 2018 (down 11.1%) resulting from fewer business days due to the Chinese New Year holidays. Thus, CAAM anticipates that YoY growth will diminish further as growth during the corresponding period was strong last year. In 4Q FY2017, auto sales jumped as a consequence of last-minute demand before the termination of a tax cut on small passenger cars at the end of the year. Meanwhile, sales of new energy vehicles are growing steadily, increasing 54.8% YoY to 121,000 units (Fig. 2). Cumulative January-September auto sales are sluggish with a 1.5% increase YoY to million units. Sales of new energy vehicles rose 81.1% to 721,000 units (Fig. 3). By vehicle type, sales of passenger vehicles in September fell 12.0% to million units, and commercial vehicles were down 8.4% to 334,000 units (Fig. 3). Sales of all types of passenger cars decreased YoY, dropping significantly for sedans and SUVs: sedans fell 13.4% to 1,006,000 units, SUVs were down 10.1% to 873,000 units, and MPVs dropped 11.4% to 147,000 units (Fig. 3). The share of auto sales by automakers country were: 39.1% (806,000 units) for China, 22.6% (465,000 units) for Germany, 20.1% (413,000 units) for Japan, 11.0% (226,000 units) for the U.S., 5.4% (111,000 units) for South Korea, and 1.0% (21,000 units) for France. The share for Chinese automakers rose for the first time in seven months (Fig. 4). As for new energy vehicles, sales of electric vehicles (EVs) jumped 47.0% YoY to 94,000 units, while plug-in hybrid vehicles (PHVs) shot up 90.0% to 27,000 units (Fig. 3). 6

7 [Fig. 3] September 2018 Auto Sales and Growth Rates August January-August September January-September Auto sales (Mn vehicles) YoY (%) Auto sales (Mn vehicles) YoY (%) Auto sales (Mn vehicles) YoY (%) Auto sales (Mn vehicles) YoY (%) Auto sales Passenger vehicles Sedans SUVs (sport utility vehicles) MPVs (multi-purpose vehicles) Crossover SUVs Commercial vehicles Buses Trucks New energy vehicles Electric vehicles (EVs) Plug-in hybrid vehicles (PHVs) Source: Created based on data released by the CAAM Housing prices in September for 70 large- and medium-sized cities: 64 cities with month-on-month (MoM) growth On October 20, the National Bureau of Statistics (NBS) announced the housing price indices for 70 large-and medium-sized cities for September. Sales prices of newly constructed commercial residential buildings rose in 64 cities in September, three fewer than in August, showing a decrease for the first time in seven months, while prices declined in three cities, up two from August (Fig. 1). On a year-on-year (YoY) basis, housing prices were higher in 67 cities, down one city from August, and lower in two cities, unchanged from August (Fig. 2). The cities with a significant increase from the month before include Xi an (Shaanxi), up 6.2%, Hohhot (Inner Mongolia), up 2.8%, and Luzhou (Sichuan), up 2.6%. The cities which saw a large increase in housing prices YoY include Haikou (Hainan), up 21.7%, Xi an, up 20.0%, and Sanya (Hainan), up 19.6%. There was a remarkable increase in Xi an for the inland area and in Hainan for the coastal area. The average rate of MoM increase in housing prices decreased for first-,* second-,* and third-tier cities* from the previous month (Fig. 3), while the YoY increase rate rose for cities in all tiers (Fig. 4). *First-tier cities: Beijing, Shanghai, Guangzhou and Shenzhen. Second-tier cities: 31 cities including provincial capitals and sub-provincial cities. Third-tier cities: 35 of the 70 cities excluding the first- and second-tier cities above. 7

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9 [Trade/Investment] Hainan free trade pilot zone approved to focus on the medical and tourism sectors On September 16, the State Council announced a general plan for the Hainan free trade pilot zone (hereinafter, the general plan) 1 which officially approves the establishment of the free trade pilot zone (FTZ) on the island. President Xi Jinping unveiled plans to make Hainan an FTZ in April 2018 while celebrating the 30th anniversary of Hainan being made a provincial capital, positioning the region as an important zone for opening up Pacific and Indian Ocean trade. The general plan includes policies specific to the Hainan FTZ that focus on the development of the medical and tourism sectors in addition to opening-up policies common to other FTZs. Specifically, it is aimed at developing international medical tourism and cutting-edge medical care, reducing tariffs on imports of the high-tech medical equipment needed in the FTZ, promoting clinical stem cell research, establishing direct flights between the FTZ and major countries and regions around the world, operating regular cruises to areas around Hainan Island, etc. The government of Hainan said in the press conference held on the 16th that a special feature of the Hainan FTZ is that the free trade zone is much larger than the other existing FTZs, which have an average area of 120 km 2. The Hainan FTZ covers the entire island with a total area of 35,400 km 2, and investors will be able to try out various initiatives because Hainan includes areas at different levels of economic development. However, the government also pointed out the urgent need to improve human resources, market size, infrastructure, and government services, as they are less developed than in other regions. As of this announcement, China now has a total of 12 FTZs (Shanghai FTZ, etc.). 2 1 See the Chinese government website for the full text of the general plan for the Hainan free trade pilot zone (State Council Guo Fa [2018] No. 34). 2 Twelve free trade zones: - Shanghai, opened in September Tianjin, Fujian, and Guangdong, opened in April 2015 (3 FTZs) - Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shaanxi, opened in April 2017 (7 FTZs) - Hainan, opened in September 2018 Inward foreign direct investment for September rises 8.3% YoY while outward drops 15.0% On October 17 and 22, the Ministry of Commerce (MOFCOM) announced the statistical data for inward and outward foreign direct investment. The amount of inward foreign direct investment (excluding the financial sector) in September grew 8.3% YoY (August: up 11.4% YoY) to USD billion (executed amount) (Fig. 1). The number of newly-established foreign corporations grew by 45.7% YoY to 4,591 companies. On the other hand, outward foreign direct investment (excluding the financial sector) dropped 15.0% YoY* (August: down 23.3% YoY*) to USD 7.93 billion,* decreasing for the fourth consecutive month (Fig. 2). * Calculated by MUFG Bank based on inward foreign direct investment data released by MOFCOM 9

10 <Inward foreign direct investment> Cumulative January-September inward foreign direct investment grew 6.4% YoY to USD billion (executed amount), while the number of newly-established companies shot up 95.1% to 45,922 (Fig. 3). By country or region, cumulative direct investment from Japan from January-September rose 34.0% YoY* to USD 3.15 billion (Fig. 4). Investment from the EU, ASEAN countries and the U.S. also grew YoY, rising 22.3% to USD 8.47 billion, 21.0% to USD 4.76 billion, and 10.3%* to USD 2.78 billion respectively. There was a significant increase in direct investment from the U.K. and Korea, rising 185.0%* to USD 3.05 billion and 45.9%* to USD 3.78 billion respectively. * Calculated by MUFG Bank based on inward foreign direct investment data released by MOFCOM By industry, investment in the manufacturing sector was up 13.2% YoY to USD billion, while investment in the service sector rose 3.0% YoY to USD billion. <Outward foreign direct investment> The cumulative January-September outward foreign direct investment amount increased 5.1% YoY to USD billion (Fig. 3). By country or region, direct investment in the Belt and Road Initiative region continued to grow with a 12.3% increase YoY to USD billion. The breakdown by industry shows that the major industries for outward investment are leasing/commercial services accounting for 32.8%, manufacturing for 16.7%, mining for 9.7%, and wholesale/retail for 9.2%. 10

11 [Finance/Exchange] CHINA BIWEEKLY(November 12 th 2018) January-September cross-border RMB settlements According to an announcement made by the People s Bank of China (PBoC) on October 17, cross-border RMB settlements for January-September amounted to RMB 3.71 trillion for ordinary items, of which RMB 2.64 trillion came from trade of goods and RMB 1.07 trillion from trade in services. RMB 1.99 trillion was recorded for capital items, of which RMB 1.37 trillion came from inward foreign direct investment and RMB billion from outward foreign direct investment. New RMB loans for September increase by RMB billion YoY The People s Bank of China (PBoC) announced on October 17 that new RMB loans for September increased RMB billion YoY to RMB 1.38 trillion, which is RMB 100 billion greater than the previous month. Social financing,* which shows the amount of liquidity supplied to the real economy, fell RMB 39.7 billion YoY to RMB 2.21 trillion, up RMB billion from the previous month. Money supply (M2) as of the end of September was up 8.3% YoY to RMB trillion. The growth rate increased 0.1 percentage point from the previous month. * Total social financing = RMB loans + foreign currency loans + entrusted loans + trust loans + bank acceptances + corporate bonds + stocks issued by non-financial firms + insurance company payouts + investment properties + other 11