LI & FUNG China Trade Quarterly

Transcription

1 LI & FUNG China Trade Quarterly Domestic and Foreign IN THIS ISSUE : Part One : Domestic Trade I. Recent development 2 II. Highlights 10 III. Outlook 13 Part Two : Foreign Trade Domestic Trade October 2010 Issue 20 Retail sales of consumer goods reached 11,102.9 billion yuan in 1-3Q10, up nominally by 18.3% yoy. Consumer confidence remained stable. China s CPI growth continued its upward trend, while growth of the PPI and the purchasing price index of raw material, fuel and power moderated. The Chinese government has continued to provide strong financial support for boosting domestic consumption. According to the Ministry of Commerce, the government will have spent more than 80 billion yuan on stimulating consumption in FY10. The acceleration in public housing construction is set to boost domestic demand, and will stimulate the sales of home appliances, furniture, decoration materials, audio-visual equipments, etc. I. Recent developments 18 II. Highights 24 III. Outlook 27 China s central bank raised interest rates on 20 October, the first time since Dec 07. The objectives were to lower inflation expectations and to curb asset bubbles through correcting the negative real interest rate situation. We do not think it marked the beginning of a rate hike cycle in China, as the Chinese policy makers still need to strike a balance between controlling inflation and preventing economic slowdown. It is also worrisome that raising the domestic interest rate would trigger more hot money inflow. The Chinese leaders approved the proposal of the 12th Five-Year Plan. The primary goal for is to transform the pattern of economic development. The Chinese government will strengthen its efforts to adjust the economic structure, promote scientific and technological innovation, secure and improve people s livelihood, build a resource-saving and environmental-friendly society, deepen reform and opening-up in the next five years. Foreign Trade In 1-3Q10, China s exports reached US$ 1,134.6 billion, up by 34.0% yoy. Import value amounted to US$ 1,014.0 billion in 1-3Q10, compared to US$ billion in 1-3Q09. China s trade with its major trading partners showed significant growth. In 1-3Q10, Sino-EU trade amounted to US$ billion, up 34.4% yoy; Sino-US trade rose by 31.5% yoy to US$ billion; Sino-Japan trade grew by 32.2% yoy to US$ billion; Sino-ASEAN trade increased by 43.7% yoy to US$ billion. 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 FDI in China rose by 16.6% yoy in 1-3Q10, boosted by the rapid growth of FDI in the tertiary sector. FDI in the tertiary sector increased significantly by 32.1% yoy in 1-3Q10, and its share in the total FDI reached 45.0%. The RMB appreciation against the US dollar has quickened since early September. The nominal RMB/USD exchange rate rose from 6.78 on 9 September to 6.65 on 15 October, the highest level since 1994, before softening to 6.69 on 27 October. The world economic growth is expected to moderate a bit in According to the latest predictions by the IMF, the world economic growth will moderate from 4.8% in FY10 to 4.2% in FY11. Growth of the advanced economies is projected to be 2.7% and 2.2% in FY10 and FY11 respectively; while growth of the emerging and developing economies will be 7.1% and 6.4% respectively in FY10 and FY11 respectively. 1

2 Li & Fung China Trade Quarterly October 2010 Issue 20 Part One: Domestic Trade I. Recent Development 1. China s economic growth in 3Q10 was stronger than expected Supported by resilient domestic demand, China s GDP growth came in at 9.6% yoy in 3Q10. The growth rate was higher than market expectation Due to government s crackdown on real estate speculation and local government borrowing, measures to get rid of backward production capacities, energy-intensive and high-polluting industries, as well as the higher comparison base in 3Q09, it had been widely expected that China s GDP growth would moderate to around % yoy in 3Q10, down from 10.3% yoy in 2Q10. The stronger-than-expected GDP growth and other key economic indicators such as retail sales, FAI, VAIO, export etc. suggest that the Chinese economy is heading for a soft landing. Overall, China s GDP amounted to 26.9 trillion yuan in 1-3Q10, up 10.6% yoy in real terms. (See exhibit 1) Among industries, the growth rate of the value added of the secondary industry moderated to 12.6% yoy in 1-3Q10, compared to 13.2% yoy in 1H10. Growth of the tertiary industry edged down from 9.6% yoy in 1H10 to 9.5% yoy in 1-3Q10; and growth of the primary industry accelerated to 4.0% yoy in 1-3Q10, compared to 3.6% yoy in 1H10. Looking forward, we expect that China s GDP growth will soften further to 9.0% in 4Q10. The GDP growth is projected to moderate from around 10% in FY10 to around 9% in FY11, due to slower growth of export and investment. Exhibit 1: China s real GDP growth, 4Q09-3Q10 FY09 9.1% 4Q % 1Q % 2Q % 3Q10 9.6% Source: National Bureau of Statistics, PRC 2

3 Domestic and Foreign 2. Retail sales grew steadily in 1-3Q10 According to the National Bureau of Statistics (NBS), the total retail sales of consumer goods reached 11,102.9 billion yuan in 1-3Q10, up nominally by 18.3% yoy. By month, the nominal growth of retail sales was 17.9% yoy, 18.4% yoy and 18.8% yoy in July, August and September respectively. And according to the Ministry of Commerce, retail and catering sales in China s national holiday, the Golden Week, (1-7 October 2010) rose by 18.7% from the same period last year to billion yuan. (See exhibit 2) Exhibit 2: China s total retail sales of consumer goods, Oct Sep 2010 Source: National Bureau of Statistics, PRC Urban retail sales registered stronger growth in 1-3Q10. Urban retail sales reached 9,598.7 billion yuan in 1-3Q10, up nominally by 18.7 % yoy. 1 Meanwhile, rural retail sales were 1,504.1 billion yuan, up nominally by 15.8% yoy. By mode of sales, the retail sales of commodities were 9,839.7 billion yuan, up by 18.4%; and those of the catering industry were 1,263.2 billion yuan, up by 17.6%. 2 The retail sales of commodities of enterprises above designated size 3 grew by 29.3% to 4,094.5 billion yuan in 1-3Q10. Among which, gold, silver, and jewelry, furniture and petroleum and related products achieved the strongest growth in 1-3Q10. The stunning 43.4% yoy growth of sales of gold, silver, and jewelry was partly attributable to consumers buying gold or jewelries as an inflation hedge under rising inflation expectations. Sales of furniture grew by 38.4% yoy while those of petroleum and related products rose by 35.0% yoy. Exhibit 4 demonstrates China s nominal growth rates of retail sales of enterprises above designated size by commodity. 1 Prior to 1Q10, urban area was defined as cities and rural area was defined as counties or below. They were recategorized into city and town in the NBS announcements since 1Q10. 2 Since January 2010, the NBS has adopted new categories for total retail sales of consumer goods. Retail sales of commodities and retail sales of catering industry replaced the previous categories of retail sales in the wholesale and retail industries and retail sales in the accommodation and catering industries. 3 Enterprises above designated size refer to enterprises with annual sales of 5 million yuan or above and with an employment of or over 60. 3

4 Li & Fung China Trade Quarterly October 2010 Issue 20 Exhibit 3: China s total retail sales, Q10 yoy growth (%) FY09 1Q10 1H10 1-3Q10 Total retail sales Commodities NA of which: enterprises above designated size NA Catering NA Source: National Bureau of Statistics, PRC Exhibit 4: China s retail sales of enterprises above designated size by commodity, Q10 yoy growth (%) FY09 1Q10 1H10 1-3Q10 Clothing, shoes, hats and textiles Cosmetics Stationeries and offices accessories Goods for daily use Home appliances and video equipments Furniture Grain, oil, food, beverages, tobacco, and liquor Gold, silver, and jewelry Telecommunication equipments Automobiles Petroleum and related products Building and decoration materials Sports and entertainment products Chinese and western medicine Source: National Bureau of Statistics, PRC 3. Consumer confidence remained fairly stable Consumer confidence dropped slightly in July and August 2010, posting and respectively. But in general, the index was fairly stable. (See exhibit 5) Exhibit 5: China's consumer confidence index, Sep Aug 2010 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Source: National Bureau of Statistics, PRC 4

5 Domestic and Foreign 4. Both urban and rural household income showed faster nominal growth in 1-3Q10 Compared with 1H10, both urban and rural household income showed faster nominal growth in 1-3Q10. The per capita disposable income of urban households, which reached 14,334 yuan in 1-3Q10, grew by 10.5% yoy in nominal terms, 0.3 ppt. higher than the yoy growth rate in 1H10. The per capita cash income of rural households amounted to 4,869 yuan in 1-3Q10. The nominal growth rate increased to 13.1% yoy in 1-3Q10, up from 12.6% yoy in 1H10. In real terms, in 1-3Q10, the growth rate of the per capita disposable income of urban households was 7.5%, faster than that of the per capita consumption expenditure of urban households (6.3% yoy). The per capita cash income of rural households gained 9.7% yoy in real terms in 1-3Q10, compared to the 7.3% yoy real growth rate of the per capita cash expenditure on consumption of rural households. 5. China s CPI growth continued its upward trend, while the yoy growth rates of the PPI and the purchasing price index of raw material, fuel and power moderated throughout 3Q10 The yoy growth rate of China s consumer price index (CPI) 4 continued its upward trend throughout 3Q10. The CPI growth rose from 3.3% yoy in July to 3.5% yoy in August, and further edged up to 3.6% yoy in September. The rising CPI growth was largely attributable to the higher prices of vegetables and meat triggered by the adverse weather conditions. The price index of food, which weighs 33.2% in the CPI accounting, rose by 8.0% yoy, whilst that of nonfood grew by 1.4% yoy only in September. (See exhibit 6 & 7) Particularly noteworthy is that the month-on-month (mom) growth of the CPI has rebounded since July. The price index registered positive mom growth of 0.4%, 0.6% and 0.6 in July, August and September respectively. Looking ahead, as China is set to have a bumper grain harvest this year according to the NBS. We expect to see grain prices staying largely stable in the near term. Besides, if weather conditions in China improve, it is likely that prices of vegetables and meat will go down and so will the CPI growth. On the other hand, China s CPI will continue to be supported by rising labour costs, pass-through of upstream price pressures, strengthening domestic demand, as well as the buildup of inflation expectations. In a bid to lower inflation expectations as well to curb speculative property demand, China s central bank raised the benchmark deposit and lending rates on 20 October. (More details will be covered in the Highlights section.) Taking all these factors into account, we predict that the CPI growth will reach 4% in FY10, and stay at around 3-4% in FY11. 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

6 Li & Fung China Trade Quarterly October 2010 Issue 20 Exhibit 6: China s CPI growth, Oct Sep 2010 Oct % Nov 0.6% Dec 1.9% Jan % Feb 2.7% Mar 2.4% Apr 2.8% May 3.1% Jun 2.9% Jul 3.3% Aug 3.5% Sep 3.6% Source: National Bureau of Statistics, PRC Exhibit 7: China s CPI growth by commodity, Apr - Sep 2010 yoy growth (%) Apr-10 May Jun Jul Aug Sep 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 After peaking at 7.1% yoy in May, the growth rate of China s producer price index (PPI) 5 moderated all the way to 4.3% yoy in August, and stayed flat in September. (See exhibit 8) In the foreseeable future, we believe that ex-factory prices will be supported by factors such as pass-through of upstream price pressures, rising labour costs, as well as the reduction in supply due to the recent energy saving campaign. In early August, the Ministry of Industry and Information Technology ordered enterprises to shut down 2,087 energy-inefficient factories by the end of September. Besides, a number of provinces such as Hebei, Jiangsu, Zhejiang, etc. have limited power supply to energy-intensive sectors, including steel, cement, polyester, papermaking, etc. It is likely that such efforts will constrain the total output of manufacturing sector in China, and further boost prices of many types of manufactured products, against the backdrop of strong domestic demand and improving foreign demand. For example, prices of steel and cement have risen sharply recently, driven by lower levels of stockpiles. 5 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 8: China s PPI growth, Oct Sep 2010 Oct % Nov -2.1% Dec 1.7% Jan % Feb 5.4% Mar 5.9% Apr 6.8% May 7.1% Jun 6.4% Jul 4.8% Aug 4.3% Sep 4.3% Source: National Bureau of Statistics, PRC The yoy growth rate of China s purchasing price index of raw material, fuel and power 6 moderated all the way from 12.2% in May to 7.1% yoy in September. (See exhibit 9 & 10) Looking ahead, we do not expect the yoy growth rate of this index to fall much in the near future, despite the higher comparison base in 4Q09. Some price indicators show that prices of production inputs have picked up again. For example, the input prices sub-index of China s manufacturing PMI rebounded strongly from the recent low of 50.4 in July to 60.5 in August, and further surged to 65.3 in September. Another index indicating input prices compiled by the Ministry of Commerce shows that input prices have started an upward trend again since mid July and reached the recent peak in early October, the highest level since early May. These figures raise renewed concern about the problems of production cost pressure and squeezed producers margins, and suggest stronger inflationary pressure on downstream prices in the near and medium term. Also noteworthy is that the US central bank is likely to launch a new round of quantitative easing in November The action is set to trigger strong rises in global commodity prices. The pace of RMB appreciation would be another factor, as RMB appreciation would help to bring down the prices of imported commodities for China. Exhibit 9: China s purchasing price index of raw material, fuel and power, Oct Sep 2010 (% yoy growth) Oct % Nov -3.6% Dec 3.0% Jan % Feb 10.3% Mar 11.5% Apr 12.0% May 12.2% Jun 10.8% Jul 8.5% Aug 7.5% Sep 7.1% Source: National Bureau of Statistics, PRC 6 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 October 2010 Issue 20 Exhibit 10: China s purchasing price index of raw material, fuel and power by selected commodity, Apr - Sep 2010 yoy growth (%) Apr-10 May Jun Jul Aug Sep Fuel & power Ferrous metals Non-ferrous metals Chemical materials Source: National Bureau of Statistics, PRC 6. China s industrial production growth stayed stable in 3Q10 The yoy growth of value-added of industrial output (VAIO) in China stabilized at around % yoy throughout June to September. (See exhibit 11) Overall, China s industrial production registered growth of 16.3% yoy in 1-3Q10, compared to 11.0% yoy in FY09. Of which, the industrial output of heavy industry rose by 17.5% yoy; while that of light industry increased by 13.6% yoy in 1-3Q10. A number of provinces in China have started limiting power supply to energy-intensive sectors since August, in order to meet their energy saving targets by the end of this year. The power production in China dropped from billion kwh in August to billion kwh in September. As a result, we have seen reduction in output in a number of sectors. For example, crude steel output declined from 51.6 million tons in August to 48.0 million tons in September. We expect that China s manufacturing sector will regain its growth momentum in the near future, boosted by the acceleration in public housing construction. After having declined for three consecutive months, the output sub-index of China s manufacturing PMI, which is regarded as a leading indicator of the sector, picked up from 52.7 in July to 53.1 in August, and further went up to 56.4 in September. The output index suggests that China s industrial production is set to grow faster in the coming months. Exhibit 11: China s industrial production growth, Oct Sep 2010 Oct % Nov 19.2% Dec 18.5% Jan-Feb % Mar 18.1% Apr 17.8% May 16.5% Jun 13.7% Jul 13.4% Aug 13.9% Sep 13.3% Source: National Bureau of Statistics, PRC 8

9 Domestic and Foreign 7. China s FAI maintained strong growth in 1-3Q10 China s nominal fixed asset investment (FAI) maintained strong growth of 24.0% yoy in 1-3Q10, compared to 25.0% yoy in 1H10. Overall, China s FAI totaled 19,222.8 billion yuan in 1-3Q10. Of which, urban FAI amounted to 16,587.0 billion yuan in 1-3Q10, up by 24.5% yoy, compared to the growth rate of 24.9% yoy in 1H10. Taking a closer look at the monthly figures, the urban FAI growth stabilized at around % yoy throughout July to September. (See exhibit 12) Among different industries, the tertiary industry recorded urban FAI growth of 26.7% yoy in 1-3Q10, higher than that of the secondary industry (22.0% yoy). Growth of urban FAI in real estate development stayed robust at 36.4% yoy in 1-3Q10, compared to 38.1% yoy in 1H10. It is noteworthy that the property tightening measures introduced by the Chinese government in mid-april 2010 and in late September have resulted in the decline in property transactions in China, leading to concerns about the slowdown of FAI in real estate development. Nevertheless, we believe the impact of the property tightening measures on FAI in real estate development will be offset by the recent acceleration in public housing construction in China. (More details can be found in the Highlights section.) Exhibit 12: China s urban FAI growth, Oct Sep 2010 Oct % Nov 24.3% Dec 24.1% Jan-Feb % Mar 26.4% Apr 26.1% May 25.4% Jun 24.9% Jul 22.3% Aug 23.9% Sep 23.2% Source: National Bureau of Statistics, PRC 9

10 Li & Fung China Trade Quarterly October 2010 Issue 20 II. Highlights 1. A recent study suggests the huge amount of gray income in China According to a recent study by Dr. Wang Xiaolu, a prominent Chinese economist, the total amount of gray income earned by households in China might hit 5.4 trillion yuan in Such an amount of gray income was equivalent to around 30% of the total disposable household income in 2008 reported by the NBS. According to Dr. Wang, gray income was obtained from illegal or questionable sources, and was closely connected to corruption. Most of the gray income went to households with high income levels. In response, the National Bureau of Statistics of China (NBS) published two articles on its website in late August, asserting that Dr. Wang had overestimated the amount of gray income as there were flaws in the methodology of the survey and the estimation. Although we are skeptical as to whether the amount of gray income was as large as Dr. Wang estimated, it is without doubt that the official statistics tend to underestimate the income earned by households with high income levels. The consumption implication, however, is that the potential of the luxury market in China could be bigger than previously estimated. 2. The Chinese government has continued to provide strong financial support for boosting domestic consumption The Chinese government has continued to provide strong financial support for boosting domestic consumption, even though the economic recovery has already been on a firm footing. According to the Ministry of Commerce, the government will have spent more than 80 billion yuan on stimulating consumption in FY10. In fact, in recent years, the government has adopted a series of measures to encourage purchases of home appliances, automobile, agricultural equipments, etc. These policies have so far been effective. For example, the sales of home appliances under the rural subsidies scheme for home appliance purchases soared by 2.4 times over a year ago to 83.8 billion yuan in Jan-Jul Also, as of 10 August 2010, the sales of home appliances under the old-for-new (trade-in) subsidies scheme reached 71.0 billion yuan. Looking ahead, it is expected that the growth rates of China s export and investment will moderate in Thus, the role of domestic consumption as an economic driver will become more important. We believe that the government will strengthen its efforts to support consumption, in order to change the growth model from export-oriented and investment-led to consumption-driven. 3. The acceleration in public housing construction is set to boost domestic demand We notice that the Chinese government has strengthened its efforts to increase the supply of public housing recently. The local media reported that the construction of 4.1 million units of public housing had started as of end-august

11 Domestic and Foreign According to the Government Work Report released in early March this year, the Chinese government planned to build 3 million new units and renovate 2.8 million existing units of public housing in However, the Chinese government s determination to achieve the goal has been questioned, as the government failed to meet the targets in the past few years. Recent signs indicate that the Chinese government has become more determined to promote the public housing program. To ensure that local governments would implement the program, the Ministry of Housing and Urban-Rural Development signed a letter of responsibility with local governments nationwide in May. Besides, in 3Q10, the Vice Premier Li Keqiang, who is widely expected to be China s next Premier, repeatedly stressed the importance of the development of the public housing program. We believe that the government has strong motivation to push forward the public housing program this time. Property prices in China have soared over the past few years. Many Chinese households find it a lot more difficult to buy homes nowadays. The government is under huge political pressure to solve this problem. One of the major policy initiatives, thus, is to greatly increase the supply of public housing. In addition, since the property tightening measures are expected to cool down the private investment in the real estate sector, accelerating investment in public housing is seen as a move to fill the FAI gap and to avoid a hard landing of the economy. Looking ahead, we believe that the government will continue its efforts to build public housing in the next few years. This will become an important driver of China s domestic consumption, as the increase in public housing will in turn stimulate the sales of home appliances, furniture, decoration materials, audio-visual equipments, etc. 4. China s central bank raised interest rates on 20 October, the first time since December 2007 The yoy growth rates of both money supply and RMB loans stayed largely stable in the recent months. As of end- Sep 2010, the broad money supply (M2) rose by 19.0% yoy, slightly higher than the 18.5% yoy growth registered as of end-jun The amount of total outstanding RMB loans increased by 18.5% yoy as of end-sep 2010, compared to the 18.2% yoy growth as of end-jun Banks in China are on track to meet the new RMB loans target for FY10 set by the government (i.e. 7.5 trillion yuan). Together banks increased their RMB lending by 1.7 trillion yuan in 3Q10, and therefore, the new RMB loans amounted to 6.3 trillion yuan in 1-3Q10. (See exhibit 13) For the first time since December 2007, the People s Bank of China (PBOC), China s central bank, raised the benchmark deposit and lending rates on 20 October. The one-year benchmark deposit and lending rates were increased by 25 bps. The move was a surprise to the market, as it had been widely expected that the central bank would not raise interest rate until 1H11. The main objective was to lower inflation expectations. It is noteworthy that, in late October, the governor of the central bank Zhou Xiaochuan suggested that China would face rising risks from inflation, asset bubbles, etc. The rate hike was also a move to correct the negative real interest rate situation, as well as to curb speculative property demand and ease property prices. And as the growth momentum of the Chinese economy remains strong, the negative impact of the rate hike on the Chinese economy is expected to be limited. 11

12 Li & Fung China Trade Quarterly October 2010 Issue 20 Earlier in 2009, the PBOC adopted an extremely loose monetary policy to stimulate the Chinese economy. Afterwards, in response to growing concerns about overheating of the economy, rising inflation and property bubble, the central bank has taken a series of tightening measures to mop up excess liquidity from the market since early For example, the banks reserve requirement ratio (RRR) was raised by 50 bps on 10 May, for the third time this year. Looking ahead, we do not think the increase in interest rate marked the beginning of a rate hike cycle in China, as the central bank s decision on interest rate is likely to be affected mainly by China s CPI growth in coming months. The Chinese policy makers are trying to strike a difficult balance between controlling inflation and preventing economic slowdown. It is also worrisome that raising the domestic interest rate would trigger more hot money inflow. Recently, central banks in advanced economies such as the US, Japan, etc. have strengthened their efforts to inject liquidity into their economies, and thus the currencies of these countries would be under greater pressure to depreciate. The market expectation of depreciation of these currencies, together with China s interest rate hike, may lead to massive inflows of hot money to China, and complicate the central bank efforts to contain inflation. Therefore, we believe the PBOC will remain cautious about raising interest rates again in the near future. 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-Oct % % End-Nov % % End-Dec % % End-Jan % % End-Feb % % End-Mar % % End-Apr % % End-May % % End-Jun % % End-Jul % % End-Aug % % End-Sep % % 7 The moves included banks reserve requirement ratio (RRR) hikes, implementation of monthly loan quotas, upward adjustments of interest rates of its newly-issued central banks bills, etc. Detailed discussion can be found in Li & Fung Trade Quarterly, Issue

13 Domestic and Foreign New RMB loans (trillion yuan) FY FY Oct Nov 0.3 Dec 0.4 Jan Feb 0.7 Mar 0.5 Apr 0.8 May 0.6 Jun 0.6 Jul 0.5 Aug 0.5 Sep 0.6 Source: People s Bank of China III. Outlook 1. The Chinese government is likely to push forward with its efforts to improve China s economic structure, although the growth momentum has moderated China s GDP growth slowed all the way from 11.9% yoy in 1Q10 to 9.6% yoy in 3Q10. Some market observers suggest that the government will ease its monetary policy and crackdown measures on real estate speculation, in order to avoid economic slowdown. Nevertheless, recent government actions indicate that the Chinese policymakers have paid more attention on the sustainability of China s economic development, as well as on optimizing the economic structure. In August, a number of provinces have started limiting power supply to energy-intensive sectors, in a bid to promote energy conservation. In late September, the government introduced a new round of property tightening measures, in order to cool the property sector. And according to the local media, the China Banking Regulatory Commission (CBRC) has ordered banks to tighten loans to property developers recently. Then, in October, China s central bank raised benchmark deposit and lending rates, with the purpose of containing inflation expectations and curbing speculative property demand. All these measures are likely to lead to supply side adjustment and weaker domestic demand, thereby cooling down China s economic growth. Looking forward, China s GDP growth is expected to moderate further in 4Q10. Still, we do not think the government will cut back on its tightening measures or policies aiming at structural adjustment. Instead, as we are going to discuss next, the government will continue to strengthen its efforts to improve China s economic structure in the 12th Five Year Plan period. 13

14 Li & Fung China Trade Quarterly October 2010 Issue The Chinese leaders approved the proposal of the 12th Five-Year Plan On 18 October 2010, the Fifth Plenary Session of the 17th Central Committee of the Communist Party of China (CPC) was concluded. The Chinese leaders approved the proposal of the 12th Five-Year Plan, a policy blueprint for the country s development in the next five years. Note that the Chinese leaders have only set the tone for the fiveyear plan. The details of the plan will not be finalized until the government submits the plan to the National People s Congress in March 2011 for approval. According to the communiqué 8 and the proposal 9, the primary goal for is to transform the pattern of economic development in China. Therefore, the Chinese government will strengthen its efforts to adjust China s economic structure, promote scientific and technological innovation, secure and improve people s livelihood, build a resource-saving and environmental-friendly society, deepen reform and opening-up in the next five years. The major goals include: (i) To maintain stable and relatively fast economic growth (ii) To make major breakthroughs in economic restructuring (iii) To achieve broad and relatively rapid increase in household income (iv) To greatly enhance social development (v) To deepen reform and opening-up The major tasks are highlighted as follows: (i) To expand domestic demand, especially household consumption; to further enhance the role of domestic consumption as an economic driver. (ii) To promote the development of modern agriculture; to transform and upgrade the manufacturing industry; to nurture the strategic emerging industries; to speed up the development of the service sector; to promote the cultural industry to become one of the pillar industries of the national economy. (iii) To promote coordinated regional development; to push forward urbanization in an appropriate manner. (iv) To promote environmental protection and resource conservation; to combat climate change (Binding targets of reduction of energy intensity and carbon emissions will be set.) (v) To improve the mechanism for technological innovation; to accelerate education reform (vi) To increase the share of household income in national income; to raise the share of labour income in the initial income distribution. Particularly noteworthy is that the government aims to raise China s household consumption rate, as part of its determination to stimulate consumption. (China s household consumption rate, defined as the ratio of household consumption expenditure to GDP, is low compared to most countries in the world. It sank to 35.1% in 2008, the lowest on record, before edging up a bit to 35.6% in 2009.) To raise consumption demand, the government will push forward urbanization, speed up the development of the service sector, boost income of low- and middle-income households, expand the coverage of the social security system, etc. We also expect that sourcing costs in China will be on an upward trend. According to the 12FYP proposal, the government will raise minimum wage levels gradually, levy environmental protection tax, push forward reform of the resources tax system, etc

15 Domestic and Foreign Moreover, the government aims at trade balance. As China continues to record large trade surplus, China s trade disputes with its trading partners have worsened. The government emphasizes the role of import in macroeconomic stability and structural adjustment, and will continue with its policies to boost imports. Detailed discussion can be found in the Highlights section. Other key points include the extension of the coverage of the value-added-tax, as well as the reduction in business tax. 3. Chinese entrepreneurs, in general, became more optimistic about the prospects of their industries Chinese entrepreneurs, in general, became more optimistic about the prospects of their respective industries in 3Q10, as China s Entrepreneur Confidence Index (ECI) rose from in 2Q10 to in 3Q10, the highest since 2Q (See exhibit 14) Except the social services sector, all sectors surveyed recorded higher readings in 3Q10, compared with 2Q10. Particularly noteworthy is that the ECI of the property sector rebounded strongly by 11.4 points from the previous quarter, despite the property tightening measures introduced in mid-april. The ECI of the wholesale & retail sector went up to in 3Q10, still above the national average. (See exhibit 15) The ECIs in the eastern, central and western regions posted qoq gains in 3Q10, reaching 135.7, and respectively. (See exhibit 15) Exhibit 14: Entrepreneur Confidence Index 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q Source: National Bureau of Statistics, PRC 10 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. 15

16 Li & Fung China Trade Quarterly October 2010 Issue 20 Exhibit 15: Entrepreneur Confidence Index: By sector 2Q10 3Q10 Compared with the previous quarter National Higher By sector Industry Higher - Mining Manufacturing Electricity, gas & water Construction Higher Transportation, storage & post service Higher Wholesale & retail Higher Property Higher Social services Lower Information transmission, computer service and software Almost the same Hotel & catering Higher By region Eastern region Higher Central region Higher Western region Higher Source: National Bureau of Statistics, PRC 4. PMI has increased for two consecutive months After declining for three consecutive months, China s manufacturing PMI has trended upward again since August, showing encouraging sign for the Chinese economy. The PMI rebounded from the recent low of 51.2 in July to 51.7 in August and 53.8 in September, indicating that the expansion of the manufacturing sector in China has accelerated again. The continuous improvement in the PMI suggests that the risk of an economic slowdown is low. Besides, as the headline PMI has already stayed above the expansionary 50-mark for nineteen consecutive months, we believe that the economic recovery is on a firm footing. (See exhibit 16) The new orders index bottomed at 50.9 in July, and then rose to 53.1 in August and 56.3 in September, indicating a surge in new orders. Meanwhile, the new export orders index increased from 51.2 in July to 52.2 in August, before edging up to 52.8 in September. The new orders index was higher than the new export orders index throughout July to August, indicating that domestic demand grew much faster than foreign demand. 11 The strong rebound in domestic orders was partly attributable to the acceleration in public housing construction. In response to rising orders, the Chinese manufacturers have increased their output. The output index picked up from 52.7 in July to 53.1 in August, and further went up to 56.4 in September, suggesting that the VAIO growth is set to rise in coming months. 11 We have received a number of enquiries on this point. 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. 16

17 Domestic and Foreign Nevertheless, the input prices index rebounded strongly from the recent low of 50.4 in July to 60.5 in August, and further surged to 65.3 in September. These figures raise renewed concern about the problems of production cost pressure and squeezed producers margins, and suggest stronger inflationary pressure on downstream prices in the near and medium term. Though prices of production inputs trended upward again, we see more purchasing activities for raw materials and parts, implying the improvement in business confidence. The purchases of inputs index moved up from 51.9 in August to 56.2 in September, while the stocks of major inputs index rose from 47.3 in August to 49.1 in September. Looking forward, we expect the headline PMI to fluctuate between in coming months. Industrial activities will continue to be boosted by Beijing s accelerated efforts to build public housing. The improving auto market may become another favourable factor, if the improvement continues in the coming months. Downside risks, however, include the extent of the slowdown in property investment by real estate developers, the uncertainties about the global economy and China s export growth, as well as the policy intensity to get rid of backward production capacities, energy-intensive and highly-polluting industries. Exhibit 16: China manufacturing PMI at a glance, September 2010 Index s. Adj Index Index Compared with the Previous Month Direction PMI 53.8 Higher Expanding Output 56.4 Higher Expanding New Orders 56.3 Higher Expanding New Export Orders 52.8 Higher Expanding Backlogs of Orders 50.9 Higher Expanding Stocks of Finished Goods 45.0 Lower Contracting Purchases of Inputs 56.2 Higher Expanding Imports 52.9 Higher Expanding Input Prices 65.3 Higher Expanding Stocks of Major Inputs 49.1 Higher Contracting Employment 52.4 Higher Expanding Suppliers Delivery Time 50.4 Lower Quickening Source: 17

18 Li & Fung China Trade Quarterly October 2010 Issue 20 Part Two: Foreign Trade I. Recent development 1. Both China s exports and imports hit record high After peaking at 48.4% yoy in May, China s export growth declined all the way to 25.1% yoy in September. The moderation of the growth rate was mainly due to the rising comparison base of the previous year. In fact, China s export value in July, August and September were the highest, third highest and second highest on record respectively, indicating that demand from both advanced and emerging economies remained strong. Overall, China s exports amounted to US$ 1,134.6 billion in 1-3Q10, up by 34.0% yoy. (See exhibit 17-19) On the other hand, the domestic demand stayed robust. China s imports increased from US$ billion in 2Q10 to US$ billion in 3Q10. However, the import growth decelerated all the way from 64.7% yoy in 1Q10 to 27.4% yoy in 3Q10, along with the rising comparison base in the same period last year. Note that China s import value hit record high in September, totaling US$ billion. Overall, China s imports have surpassed the pre-crisis levels: The import value amounted to US$ 1,014.0 billion in 1-3Q10, compared to US$ in 1-3Q08 and US$ billion in 1-3Q09. China s trade surplus increased from US$ 41.0 billion in 2Q10 to US$ 65.6 billion in 3Q10. The high trade surplus has led to increasing international pressure for RMB appreciation, and the RMB appreciation against the US dollar has quickened since 9 September. However, one should note that China did not post trade surpluses against all of its trading partners. For example, China s trade deficits with Japan and ASEAN amounted to US$ 41.4 billion and US$ 12.3 billion respectively in 1-3Q10. Exhibit 17: China s quarterly foreign trade data, 4Q09-3Q10 USD billion (yoy growth) export Import Trade Balance FY09 1,201.7 (-16.0%) 1,005.6 (-11.2%) (-34.2%) 4Q (0.2%) (22.3%) 61.5 (-46.2%) 1Q (28.7%) (64.7%) 14.5 (-76.7%) 2Q (40.9%) (43.7%) 41.0 (17.7%) 3Q (32.2%) (27.4%) 65.6 (67.1%) Source: China Customs 18

19 Domestic and Foreign Exhibit 18: China s monthly foreign trade data, Oct Sep 2010 USD billion (yoy growth) export Import Trade Balance Oct (-13.7%) 86.8 (-6.8%) 24.0 (-31.9%) Nov (-1.2%) 94.6 (26.3%) 19.1 (-52.4%) Dec (17.6%) (55.6%) 18.4 (-52.7%) Jan (21.0%) 95.3 (85.6%) 14.2 (-63.8%) Feb 94.5 (45.7%) 86.9 (44.7%) 7.6 (57.2%) Mar (24.2%) (66.4%) -7.2 (-139.0%) Apr (30.4%) (50.0%) 1.7 (-87.2%) May (48.4%) (48.9%) 19.5 (45.9%) Jun (43.9%) (34.6%) 20.0 (140.2%) Jul (38.0%) (23.2%) 28.7 (170.3%) Aug (34.3%) (35.5%) 20.0 (27.5%) Sep (25.1%) (24.4%) 16.8 (30.5%) Source: China Customs Exhibit 19: Growth rates of exports and imports, Oct Sep 2010 Source: China Customs 19

20 Li & Fung China Trade Quarterly October 2010 Issue 20 Exhibit 20: Exports by category, 2009 & 1-3Q10 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 21: Imports by category, 2009 & 1-3Q10 yoy growth (%) of import value, calculated in US$ Q10 Cereal & cereal flour Soybean Iron ore Crude oil Refined oil Steel Synthetic yarn Vehicles and related parts Source: China Customs Exhibit 22: Foreign trade of China (general & processing trade), Q10 Yoy growth (%) Share (%) Item FY09 2Q10 3Q10 FY09 2Q10 3Q10 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 Source: China Customs 20

21 Domestic and Foreign 2. General trade continued to grow faster than processing trade The trade value under general trade 12 grew faster than that under processing trade in 1-3Q10, as both exports and imports under general trade showed strong growth. Boosted by the robust domestic demand for commodities, China s imports under general trade soared by 45.4% yoy in 1-3Q10. Exports under general trade also grew rapidly by 37.2% yoy in 1-3Q10. (See exhibit 22) In comparison, both exports and imports under processing trade 13 showed slower growth in 1-3Q10, up by 30.1% yoy and 36.4% yoy respectively. Consequently, the share of processing trade in China s total trade declined from 41.2% in FY09 to 39.0% in 1-3Q10. Nevertheless, processing trade still played an important role in China s trade surplus, especially as general trade recorded trade deficit. In 1-3Q10, processing trade recorded a trade surplus of US$ billion, accounting for 187.1% of China s trade surplus. In contrast, general trade recorded a trade deficit of US$ 36.4 billion over the same period. 3. China s trade with its major trading partners showed significant growth in 1-3Q10 China s trade with its major trading partners showed significant growth in 1-3Q10. Same as in FY09, the European Union (EU) was China s biggest trading partner in 1-3Q10, accounting for 16.3% of China s total foreign trade. Sino- EU trade amounted to US$ billion in 1-3Q10, increasing by 34.4% yoy. (See exhibit 23 & 24) The negative impact of the European debt crisis on the Chinese exports has so far been limited. China s export growth to the EU remained high at 35.0% yoy in 1-3Q10, compared to 36.0% yoy in 1H10. The US was China s second largest trading partner in 1-3Q10. Sino-US trade rose by 31.5% yoy to US$ billion in 1-3Q10. Japan remained the third largest trading partner of China in 1-3Q10. Sino-Japan trade grew by 32.2% yoy to US$ billion in 1-3Q10, accounting for 10.0% of China s total foreign trade. Boosted by the establishment of the ASEAN-China Free Trade Area (ACFTA) 14 since 1 January 2010, China s trade with the Association of South East Asian Nations (ASEAN) increased by 43.7% yoy to US$ billion in 1-3Q10, indicating the rapid growth in intra-regional trade. 12 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. 13 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. 14 Detailed discussion can be found in Li & Fung Trade Quarterly, Issue

22 Li & Fung China Trade Quarterly October 2010 Issue China s exports to Brazil and Russia showed stunning growth in 1-3Q10 China s exports to some major emerging countries showed considerable growth. For example, China s exports to Brazil surged by 89.9% yoy, while its exports to Russia soared by 74.6% yoy in 1-3Q10. The other three members of the BRICs, namely, Brazil, Russia and India, accounted for 6.0% of China s total exports in 1-3Q10, up from 5.1% in FY09. On the other hand, together they accounted for 6.2% of China s total imports in 1-3Q10, edging down from 6.3% in FY09. (See exhibit 23 & 24) Exhibit 23: China s trading partners, 1-3Q10 Country Trade value Share of total Export value Import value yoy growth (%) /Region (USD billion) trade (%) (USD billion) (USD billion) Total trade Export Import EU US Japan ASEAN Brazil Russia India Source: China Customs Exhibit 24: China s trading partners, Comparing the growth rates of 2009 & 1-3Q10 Yoy growth (%) Country/Region Total trade export Import Q Q Q10 EU US Japan ASEAN Brazil Russia India Source: China Customs 5. The top seven provinces/municipalities in terms of foreign trade value jointly accounted for 83.3% of China s total foreign trade in 1-3Q10 The top seven provinces/municipalities in terms of foreign trade value Guangdong, Jiangsu, Shanghai, Beijing, Zhejiang, Shandong and Fujian jointly accounted for 83.3% of China s total foreign trade in 1-3Q10. (See exhibit 25) Guangdong remained the biggest contributor to China s exports in 1-3Q10, with the total export value of the province amounting to US$ billion. Nevertheless, its export growth of 27.8% yoy was much lower than the national growth rate of 34.0% yoy in 1-3Q10. Meanwhile, Jiangsu and Zhejiang, two of the major manufacturing bases in China, recorded impressive export growth of 39.6% yoy and 38.1% yoy respectively in 1-3Q10. 22