China Economic Quarterly Q3 2018

Transcription

1 December 2018 Major economic indicators p1 /Policy updates p10 /Hot topic analysis p12 China Economic Quarterly Q As a result of the negative consequence of some reform measures, the 6.5% growth rate of GDP in Q3 is slightly lower than Q2, and the overall growth trend is expected to be maintained in the future.

2 Content Ⅰ. Major economic indicators 1 GDP growth has increased 6.5% Total fixed asset investment reached trillion yuan, expanding by 5.4% Property market has shown signs of cooling down PMI is slightly lower than the first two quarters Growth of Industrial Added Values went up by 6.4% Total retail sales of consumer goods went up by 9.3% Imports and exports have grown steadily PPI went up by an average of 4.0% Ⅱ. Policy updates Private enterprises to receive fair policy treatment China has made a significant improvement in the business climate and the government is still striving to advance it. 12 Ⅲ. Hot topic analysis: What is the impact of China s first import expo on its economy? 13

3 I Major economic indicators Figure 1: Quarterly GDP values and quarterly and annual GDP growth rate % 6.90% 6.70% 6.90% 8.00% 7.00% 6.00% GDP (Trillion yuan) % 1.80% 1.70% 1.90% 1.60% 1.70% 1.80% 1.60% 1.70% % 1.80% 2.00% 1.80% 1.80% 1.80% 1.30% 1.50% 1.40% 1.60% % 4.00% 3.00% 2.00% 1.00% 0.00% Quarterly GDP Value Quarterly Growth Annual GDP growth Source: National Bureau of Statistics of China; Wind For the third quarter in 2018, China s GDP growth has increased 6.5% (6.8% in Q1, 6.7% in Q2) year-on-year, the lowest over the past nine and half years. Total GDP reached trillion yuan by the third quarter. Compared to the previous quarterly growth of 6.7% to 6.9% since middle of 2015, 6.5% is not a surprise at all. Historically, China s GDP growth rate sharply dropped to 6.4% in the first quarter of 2009, when it was hit by the financial crisis. But for most of the years, overall growth rate was more than 10% prior and after the financial crisis. More specifically, as the government policies and regulations on real estate macro control or financial deleveraging are still tight, in Q3, the growth rate of construction (accounts for 6.39% of the total GDP), financial (8.03% of the GDP), and real estate (6.69% of the GDP) industries were only 2.5%, 4.0%, and 4.1% respectively. Fortunately, the manufacturing (29.67% of the GDP) and other service sectors (15.81% of the GDP) continued to maintain solid growth in Q3. Thus, the National Bureau of Statistics described the economy in the first three quarters as, faced with extremely complex environment abroad and daunting task of reform and development at home. It is absolutely true that a poor international environment and complicated domestic situation are the main reasons for the slowing growth. Furthermore, in early October, IMF has cut 0.2 percentage points of its forecast for global economic growth in 2018 and 2019 ( from 3.9% to 3.7%) because of the trade tensions initiated by the US with China and other countries. However, IMF said that China s GDP growth will not change this year, and for 2018 it will grow at 6.6%, and at 6.2% in In Q4, the overall economy might continue to face some challenges, but it is likely to retain growth of more than 6.5%. Going forward, whether China s GDP growth in 2019 will be more than 6.5% or not, is up to the extent of the coming reform measures issued by the central government. Source of data: Unless otherwise stated, economic data is from the National Bureau of Statistics, Wind and financial data from the People s Bank of China. There is no doubt that most of China s ongoing reform measures will serve long-term economic sustainability, but some might slow down the growth, such as the deleveraging measures. As long as the other measurements of economic growth, such as employment market, prices and household income keep the current speed, the market sentiment should be more tolerant to China s GDP figures. PwC 1

4 For the first three quarters, the output of the primary, secondary and tertiary industry was 4.21, 26.30, and trillion yuan respectively. The tertiary industry or service sector, accounting for 53.13% of the total GDP, grew by an impressive rate of 7.7% yearon-year, while the growth rates for the primary (6.4% of total GDP) and secondary industry (40.40% of total GDP) were 3.4% and 5.8% respectively. The growth rate of secondary or industrial sectors was slightly higher in Q3. For the first three quarters, the final consumption expenditure amounted to 78% (64.5% in Q3 2017) of the total GDP growth, much higher than the same period last year. Meanwhile, the gross capital formation (formerly the gross domestic investment) contributed 31.8% or dropped 2.9 percentage points than the same period last year. Again, the net exports of goods and services had a negative contribution of 9.8% (1.9% in Q3 2017), and declined 11.1 percentage points than the same period last year. Figure 2: GDP composition Obviously, the final consumption expenditure has become more critical for China s economic development. This is probably one of the major reasons why many experts have called for the central government to further cut the income tax, especially for the middle class. It would definitely boost domestic consumption if household income can be increased by cutting tax. In addition, as this year marks the 40 th anniversary of China s reform and opening up, a tax cut would be a symbolic reward to the Chinese people. Proportion % 80.00% 60.00% 40.00% 20.00% 42.69% 48.56% 44.79% 46.89% 44.34% 47.65% 44.36% 47.73% 45.54% 46.65% 47.23% 45.24% 48.11% 44.45% 50.37% 42.22% 51.82% 40.82% 51.90% 41.45% 52.30% 41.71% 50.96% 40.38% 0.00% 8.75% 8.32% 8.01% 7.91% 7.81% 7.53% 7.45% 7.41% 7.36% 6.65% 5.99% 8.66% Primary industry Secondary industry Tertiary industry 2

5 Total fixed asset investment reached trillion yuan, expanding by 5.4% (6.0% in the first half year) year-on-year in the first three quarters. The growth rate of fixed asset investment was much less than the same period in 2017 and the past few years. It has hit the lowest level in almost 20 years since If we look at the trend of the last few years, the growth rate of fixed asset investment declined from a double digit growth to about 8.5% in 2016, 7.5% in 2017, and probably around 6% for Given its huge amount and significance to GDP growth, the central government has issued some measures to boost investment, for instance, reversing deleveraging, and speeding up approval of large projects. As a result, we expect that the growth rate of fixed asset investment will stop falling in Q4, and probably rebound a little bit, maybe a few percentage points higher than the current levels. Fortunately, private investment increased by 8.7% (8.4% in the first half year) and reached to trillion yuan, or 2.7% more than the same period last year. By sectors, fixed asset investment of the primary (1.67 trillion yuan), secondary (18.07 trillion yuan) and tertiary industry (28.60 trillion yuan) went up by 11.7%, 5.2% and 5.3% respectively during the first half year. More specifically, it is worth mentioning that fixed asset investment from Hong Kong, Macao and Taiwan owned companies went down 6.0%. Meanwhile, investment of foreign-funded and domestic enterprises increased 4.7% and 5.8%. By industries, fixed asset investment of a few industries dropped below zero, such as: -5.7% in manufacturing of railways, shipbuilding, aerospace and other transportation equipment; Figure 3: Fixed Asset Investment 13.50% -10.7% in production and supply of electricity, gas and water; -10.5% in railway transportation, and; -4.7% in management of water resources. Accumulated growth rate 11.40% 10.30% 10.00% 10.70% 9.00% 9.20% 8.60% 8.20%8.10% 7.50% 7.50% 7.20% 6.00% 5.40% Obviously, most of these industries are controlled by state owned enterprises or local governments. Additionally, overall infrastructure investment only increased 3.3% and it is also a policy oriented sector. The reversal of government policies will have a big impact on these industries, and their fixed asset investment is expected to grow in Q4 and PwC 3

6 Figure 4: Growth rates in real estate Growth rate 20.0% 16.8% 16.8% 15.3% 14.8% 15.5% 15.0% 15.2% 16.3% 15.7% 12.2% 11.1% 12.9% 15.8% 15.0% 15.6% 14.7% 15.5% 11.5% 11.4% 8.9% 9.9% 11.2% 10.1% 9.9% 10.4% 10.3% 10.2% 9.7% 10.0% 9.1% 9.3% 8.8% 9.7% 9.0% 8.0% 7.4% 7.7% 8.2% 9.9% 6.1% 5.8% 7.2% 7.0% 8.1% 8.8% 2.0% 8.5% 3.1% 5.1% 5.0% 2.2% 2.6% 3.0% 7.9% 7.9% 7.8% 6.2% 7.2% 7.0% 6.6% 6.5% 6.9% 8.1% 7.8% 7.5% 2.1% 1.3% 5.3% 6.2% 5.4% 5.7% 5.3% 7.0% 4.8% 4.6% 0.0% 1.3% 1.0% -1.0% -3.0% -6.5% -5.9% -5.5% -4.3% -7.8% -8.5% -3.4% -1.2% 0.5% 2.1% -5.0% -2.1% -11.7% -6.1% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% -40.0% -33.1% -31.7% -33.8% -19.4% Growth rate of land purchased Growth rate of resources of funds Growth rate of investment As we pointed out in the previous issue, China s top leaders have emphasised stringent control over the rising housing prices for the first time in many years, and macro controls and relevant policies have been becoming even tighter for the property market. As a result, in the first three quarters, the total floor space of commercial buildings sold went up by 2.9% or 1,193 million square meters (3.3% or 771 million square meters in Q2). To be more specific, floor space of the residential buildings increased by 3.3%, office buildings dropped by 9.3%. In terms of value, the total sales value of commercial buildings went up by 13.3% or increased by trillion yuan in the first three quarters (13.2% or 6.69 trillion yuan by Q2), of which residential housing sales rose by 15.6% (14.8% in Q2). Obviously, prices of residential housing increased again nationwide, however, the growth rate was much less than the same period last year. On a month-onmonth basis, in September, both newly built and second hand residential housing in tier one cities such as Beijing, Shanghai, Guangzhou and Shenzhen have declined slightly. 4 China s property market has shown signs of cooling down. This scenario is probably inevitable and has been shown in many ways, for instance: In the first three quarters, the floor space under construction increased 3.9% year-on-year. Floor space of buildings completed (residential, office and commercial) dropped by 11.4%. Floor space of commercial housing ready for sale dropped by 13%, of which residential buildings declined 19.4%. This means that inventory is reducing, and supply is shrinking at the same time. On the other hand, investment in real estate development grew by 9.9% yearon-year to 8.87 trillion yuan during the first three quarters of this year, of which 6.28 trillion yuan or 70.8% is in residential housing. Meanwhile, the growth rate of land purchased continued to increase by 15.7% in the first nine months. The overall growth rate of sources of funds increased by 7.8% (compared to 7.2% in Q2) in the first three quarters, and the financing for developers might be more difficult. Particularly, bank loans dropped to 5.1% and personal mortgages fell to 1.2%. Foreign funds also declined 61.7%, though it is a small proportion of sources of funds for developers. Consequently, developers have to use internal resources to finance themselves and face a higher cost of capital. The property market might be not optimistic in the future which has been overheating for years. So long as it stays at a more reasonable level, overall economic growth will be more resilient and sustainable.

7 Figure 5: Purchasing Managers Index 56.0% 55.0% 54.0% 53.8% 53.4% 54.4% 53.8% 53.7% 53.7% 54.5% 55.1% 54.9% 55.4% 55.0% 54.6% 55.0% 54.9% 53.0% 52.4% Percentage 52.0% 51.0% 50.0% 50.2% 49.8% 49.7% 50.2% 50.0% 50.4% 51.4% 51.8% 51.7% 51.6% 51.5% 51.5% 50.8% 49.0% 48.0% 47.0% 46.0% Non-manufacturing Manufacturing sector 50% breaking point China s Purchasing Managers Index (PMI) for the manufacturing sector in the past three months of July to September has maintained at 51.2%, 51.3%, and 50.8% respectively. The overall PMI is slightly lower than the first two quarters. These indicate the expansion of manufacturing sector has dropped. As we mentioned in the previous issue, the escalating China-US trade dispute has affected the PMI in Q3. Particularly in September, the new export orders index and import index have declined to 48.0% and 48.5% respectively, 1.4 and 0.6 percentage points lower than the previous month. The PMI of large enterprises stayed at 52.1% in September (52.9% in June) and the PMI of medium enterprises fell just below the threshold (50%) at 48.7% (49.9% in June). The small enterprise PMI rose to 50.4% in September (49.8% in June), which rarely happens. PMI for the manufacturing of healthcare, special equipment, electrical machinery and equipment rose to 53.5% or more, much higher than other sectors. The production index and new order index stayed at 53.4% and 53.2% (53.3% in March) respectively in September. It means that overall production volume and the market demand are still stable. However, the raw materials inventory index and employed person index were still weak in September, and continued to be below the threshold at 47.8% (48.8% in June) and 48.3% (49.0% in June). Similar to Q2, the raw material inventory and the number of employees in the manufacturing sector did not improve. On the other hand, the nonmanufacturing PMI still remained at a higher level than the manufacturing, as the business activity index reached 55.0% in June. The non-manufacturing PMI of the service sector remained strong at 54.9% in September (54.0% in June). This indicates the solid performance of the service sector. By sectors, the index of business activity of retail, air transport, post, accommodation, telecommunications, software and information technology services and financial services, remained at more than 55.0% in September. Meanwhile, the index of business activity of road transportation and capital market services, as well as real estate dropped below 50% in September. For the rest of the year, the current weak manufacturing PMI might stay. It is hard to foresee when or whether it will break the threshold of 50%. For the nonmanufacturing PMI, there is no reason to worry about it at all. PwC 5

8 Figure 6: Industrial Added Values 7.60% 7.60% 6.80% 6.80% 6.20% 6.10% 5.70% 5.90% 6.00% 6.60% 6.20% 6.00% 6.00% 5.80% Growth rate Thanks to supply side structural reforms and steady production, the growth of Industrial Added Values for companies over certain scales went up by 6.4% (6.7% in Q2, in real terms) yearon-year in the first three quarters. Due to strong demand, a few sectors enjoyed a growth of 10% to 13%, including electricity, special equipment, healthcare and pharmaceuticals. The output of special equipment for environmental pollution control, new energy cars, and servers substantially increased nearly 45% to 60% in the first nine months. Thanks to the strong growth of exports, the production of station equipment of mobile communications, construction machinery, optical fibre, electronic components and smart TVs have surged from about 19% to 32%. In September, 38 of the 41 major industries enjoyed year-on-year growth. Of which, special equipment (9.7%), and computers, communications and other electronic equipment manufacturing (12.6%), ferrous metal smelting and calendaring (a finishing process used on cloth and fabrics) processing industry (10.1%), production and supply of 6 electricity and heat (11.0%) had nearly double digit growth. It is noteworthy that manufacturing of the overall automobile industry went up by only 0.7% in September (7.7% in the first nine months), much slower than previous months. More specifically, in the first nine months, the production of automobiles (20.84 million) decreased by 0.6% (or by 10.6% in September), of which passenger cars (8.66 million) increased by 3.3% (-8.6% in September) and SUVs (6.93 million) went down by 1.1% (-13.0% in September). The sharp decline of production and sales of the automobile industry is not a good sign. As a result, the profits of automobile enterprises also declined 3.8% in the first nine months. Whereas during the same period, profits from 34 of 41 major industries had increased. Automobiles is one of the seven industries that suffered a decrease in profits. Consumer confidence might have been hit by the stock market slump, China-US trade dispute and other factors. On the other hand, profits of industrial enterprises over certain scales rose by 14.7% in the first nine months to 4.97 billion yuan (17.2% year-on-year in the first half year). Most of the profits came from iron and steel, building materials, as well as the petroleum and chemical industry, which are dominated by SOEs. It seems that measures to address overcapacity in production and the rising of international and domestic price generated good results.

9 Total retail sales of consumer goods went up by 9.3% in the first nine months year-on-year to trillion yuan. It has increased by 8.8%, 9.0% and 9.2% in July, August, and September respectively. The growth of overall retail sales did not change much from Q2 to Q3, but figures from Q3 are slightly lower than Q1. It makes sense as many holidays took place in Q1. In terms of types, during the first three quarters, catering consumption accounted for 10.85% of the total retail sales of consumer goods, slightly more than automobiles. It grew by 9.8% year-on-year, while goods retail sales went up by 9.2% (7.6% in the first half year). Sales of cosmetics went up by 12.0% and home appliances grew by 13.4% year-on-year. Sales of clothes, groceries and foodstuffs (include cooking oil) went up 8.9%, 13.4% and 10.3% respectively. Sales of communication appliances (devices), petroleum and related products, and furniture all had a growth rate of more than 10%. Figure 7: Retail Sales of Consumer Goods 10.70% 10.56% 10.50% 10.41% 10.40% 10.40% 10.40% 10.40% 10.30% 10.30% 10.20% 10% 9.80% 9.40% 9.30% Accumulated growth rate Petroleum accounts for 5.26% of the total retail sales of consumer goods, while the international oil price has pushed up the sales growth, not the demand. Sales of automobiles increased only 0.2% in the first nine months, and dropped 7.1% in September. It accounts for 10.23% of the total retail sales of consumer goods in the first nine months and has pulled down total retail sales. In addition, similar to the past few years, total online sales reached 6.28 trillion yuan in the first nine months, growing by 27.0% year-on-year. Online physical goods sales accounts for 17.5% of the total retail sales of consumer goods. In comparison, the per capita disposable nominal income, reached to 21,035 yuan, has increased by 8.8% year-onyear (after adjusting for inflation, 6.6% real growth) in the first three quarters. More specifically, it was 29,599 and 10,645 yuan for urban and rural residents and obviously there is a big gap between these figures. On the other hand, the per capita consumption expenditure increased by 8.5% (6.3% real growth) to 14,281 yuan. Figure 8: National Per Capita Consumption Expenditure and Proportion (2018Q1-Q3) (Unit: RMB) Transportation and Communication, 1,931, 13.5% Healthcare and Medical Services, 1,275, 8.9% Education, Culture and Entertainment, 1,556, 10.9% Supplies and Services, 898, 6.3% Other Supplies and Services, 361, 2.5% Residence, 3,269, 22.9% Tobacco and Food, 4,063, 28.5% Clothing, 927, 6.5% Looking at the national average income and consumption pattern, it reminds us that China is still a developing country. For instance, in the first nine months, the consumption expenditure per capita was as follows: 28.5% for tobacco and food (including liquor), and 22.9% for residence; 13.5% for transportation and communication; 10.9% for education, culture and entertainment; 8.9% for healthcare and medical services, and 6.5% for clothing. PwC 7

10 Figure 9: Quarterly Balance of Trade Growth rate 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % % % % % -1.60% % -8.46% -1.54% 8.39% 20.72% 10.17% 11.07% 3.38% 8.62% -3.15% -1.74% -0.81% 0.22% 14.52% 7.42% 2.63% (Billion yuan) -1.29% 0.85% % % -8.65% 2.13% 31.28% 16.38% 12.12% 19.17% 1, % 12.66% 4.76% -5.86% -7.82% -0.40% 13.71% 8.44% 7.10% 9.84% 1,100 1, Net Export Export Growth Import Growth Amid the escalating trade dispute between China and the US, although the first round of tariffs was imposed in early July, China s imports and exports have grown steadily in Q3. The trade with the emerging markets particularly with ASEAN and Belt & Road countries went up substantially. Total imports and exports reached trillion yuan (6.75 in Q1 and in Q2), increasing by 9.9% (7.9% in Q2 and 9.4% in Q1) over the same period last year. Among them, exports went up by 6.5% (4.9% in Q2 and 7.4% in Q1) year-onyear to trillion yuan, and imports grew by 14.1% (11.5% in Q2 and 11.7% in Q1) year-on-year to billion yuan. As a result, net surplus in the first three quarters was 1.43 trillion yuan (0.90 trillion in Q2 and 0.33 in Q1), and dropped by 28.3% (26.7% in Q2) compared to the same period last year. 8 Compared to China s overall trade growth rate of 9.9%, China s imports to and exports from the US only increased 6.5% in the first three quarters to 3.06 trillion yuan (accounts for 13.8% of China total trade) because of the trade frictions. More specifically, exports to the US reached 2.27 billion yuan and increased by 7.4%, meanwhile imports from the US was billion and went up 3.8%. Most recently, in September, China s total trade with the US increased by 13.1% ( billion yuan), of which exports went up 16.6% ( billion yuan) and imports only increased by 1.6% (86.23 billion). Obviously, the trade dispute has affected imports from US to China, but not much in terms of exports yet. It did not influence China s overall growth in trade. For the first three quarters, in addition to the US, China maintained a steady growth with other major trading partners. For instance, trade with the EU increased by 7.3% (5.3% in Q2), and ASEAN went up by 12.6% (11% in Q2). China s trade with countries under the Belt & Road countries accounts for 27.3% in the first three quarters, meanwhile it accounted for 25.0% in These markets still have great potential and are expected to grow faster than others. More specifically, trade with Russia, Poland and Kazakhstan increased by 19.4%, 11.9% and 11.8% respectively. Finally, even if the trade frictions with the US cannot be solved in the near future, so far it seems that the negative impact on China s trade is not that dramatic. Fortunately, there is signal that both sides are willing to talk about this issue. The agreement by President Xi and his American counterpart, Trump during G20 summit has allowed further negotiations. The opening of China International Import Expo in Shanghai sent out a strong message that the country is eager to boost imports from the rest of world. Thus, imports in Q4 and the next few years will grow more rapidly than at present. It is safe to say that as the world s largest trading nation, China s overall trade and its economic development will continue to enjoy a prosperous trend.

11 Growth (contraction) rate Figure 10: Producer Price Index and Consumer Price Index 8.00% 7.60% 6.90% 5.50% 5.50% 6.00% 4.90% 4.70% 3.60% 4.00% 3.10% 1.38%1.39% 1.60% 1.60% 2.30% 1.88%1.92% 2.08% 0.90% 1.50%1.60% 1.80% 1.90% 2.00% 0.10% 2.10% 2.50% 0.00% -2.00% -4.00% -6.00% -8.00% -4.56% -4.81% -5.95% -4.30% -5.90% -2.60% CPI The Producer Price Index (PPI) went up by an average of 4.0% year-onyear in the first nine months, which is 2.5% lower than the same period in In July, August and September, PPI increased by 4.6%, 4.1%, 3.6% year-onyear respectively. During the first nine months, the price for means of production rose by 5.2%, and increased 4.6% in September yearon-year. More specifically, in the first nine months, the price of mining and quarrying products rose by 9.0% (5.1% in Q2) and raw materials rose by 7.1% (6.7% in Q2). Meanwhile, the price of consumer goods only increased by 0.4%. PPI Again, these price hikes were triggered by oil prices (extraction of petroleum and natural gas) which increased to 24.6% (17.0% in the first half year). As a result, prices of raw chemical materials, chemical products, rubber and plastic products also rose much more than others. Though the overall growth of PPI in the first nine months was much lower than that of in 2017, there will be no big surprise in the rest of the year. For 2019, raw materials and oil prices might continue to grow if the global economy and demand keeps expanding. Therefore PPI in China might stay at the current relatively high level, but may not rise as much as in Growth in the consumer price index (CPI) was slightly higher in Q3. CPI increased by 2.1% in the first nine months (2.0% year-on-year in the first half year). For September, CPI grew by 2.5% (1.9% in June) year-on-year, which is also higher than 2.3% in August and 2.1% in July, mostly because of the hike in food prices. For the first three quarters, in addition to the price of fuel for transport which increased by 13.1% (9.4% in Q2) year-onyear, the price of food rose by 2.5%, as a result of the rise in vegetable prices by 7.7% and in egg prices by 14.6%. Meanwhile, the price of healthcare remained at a high level and rose by 5.0%. Going forward, CPI in Q4 might be around 2.5% or a little bit lower, because overall food price is not likely to grow again and the energy related prices are hard to predict, but other parts of CPI are expected to remain stable. Historically, in the past few years, CPI has stayed between 2% to 1.5%. PwC 9

12 Ⅱ Policy Updates Private enterprises to receive fair policy treatment Some of the Chinese private companies are facing challenges due to the slowdown and at a symposium on private enterprises at the Great Hall of the People in Beijing on Nov , President Xi Jinping and other top leaders reiterated their unswerving support for the development of private enterprises. As President Xi pointed out at the meeting Private enterprises contributed to more than half of China s taxation, 60% of the GDP, 70% of the technological innovations, 80% of urban employment and 90% of newly added jobs and registered companies. President Xi, at a symposium on private enterprises at the Great Hall of the People in Beijing on Nov , President Xi Jinping and other top leaders reiterated their unswerving support for the development of private enterprises. As President Xi pointed out at the meeting, Private enterprises contributed to more than half of China s taxation, 60% of the GDP, 70% of the technological innovations, 80% of urban employment and 90% of newly added jobs and registered companies. Meanwhile, President Xi called for policies to support private companies at the symposium, more specifically: 1) The burden of taxes and fees on the companies should be eased. 2) Measures should be taken to address the difficulty and high cost of financing for private firms. 3) The playing field should be leveled. 4) Policy implementation should be improved. (This means no unfair treatment towards private companies when implementing government policies and measures). 5) A new type of cordial and clean relationship between government and business should be established. 6) Entrepreneurs personal and property safety should be ensured. Subsequently, relevant government departments, banks and local governments have quickly taken actions. For instance, the State Administration for Market Regulation has been working on the improvement of the business environment for private enterprises, banks have been increasing their lending to SMEs, and government of Guangdong province has issued policies to support private companies better access to loans, etc. 10

13 China has made a significant improvement in the business climate and the government is still striving to advance it. According to the World Bank s annual report Doing Business 2019: Training for Reform, "China advanced to a global ranking of 46 this year, up from 78 last year, as the country implemented the largest number of reforms." More specifically, China ranks: 6 th for enforcing contracts 14 th for getting electricity 28 th for starting a business 27 th for registering property 64 th for protecting minority investors 65 th for trading across borders This is one of the most successful achievements and the highest recognition for policy makers. Obviously, China s reform measures implemented in the past few years have generated remarkable progress. It is great for government departments at different levels to move forward, since there is still room for improvement. As the world s second largest economy, China should target to be on the top 10 list regarding business climate. On the other hand, a better business environment from one of the biggest markets is good news for millions of companies, not only good for the local and foreign owned, but also for those large and small enterprises. As one of the world s leading professional service companies, PwC China has been involved in and provided professional advice to the government at all levels to enhance business environment. 114 th for paying taxes 121 st for getting construction permits CHINA S OVERALL RANKINGS IN RECENT YEARS Year Ranking CHINA S RANKING FOR STARTING A BUSINESS Year Ranking Source: Doing Business 2019 by the World Bank PwC 11

14 Ⅲ Hot topic analysis What is the impact of China s first import expo on its economy? The China International Import Expo (CIIE) held in Shanghai on 5 November was initially proposed by President Xi Jinping last May. It is a major move through which China actively opens its market to the world and is also an important decision that celebrates the 40th anniversary of reform and opening up. As China s economy is shifting to a more domestic demand and consumption-driven growth model, the successful opening of the first import expo will not only be beneficial for increasing imports and promoting the balanced development of foreign trade, but it will also improve the supply side structural reform, advance the well-being of Chinese people and even accelerate the globalisation of the Chinese economy. Stimulated by the import expo, together with policies such as cutting the import tariffs and improving other relevant regulations, it is expected that the imported products related to the upgrading of consumption and people s livelihood might grow substantially in the coming years, such as in food (including agriculture), automobile, and healthcare sectors etc. 12

15 Amid mounting trade tensions, rising imports will be beneficial for the long-term economic growth The size of China s economy is currently about two thirds that of the US. But since 2013, in terms of exports and imports, China has become the world s largest market for trade for three consecutive years. In 2016, China was overtaken by the US with a difference of US $20.4 billion. In 2017, China became the world s largest market for trade in goods again, and maintained a goods trade surplus of 2.87 trillion yuan (trade in services recorded a deficit of 1.62 trillion yuan). In the past decades, trade has been one of the three drivers boosting China s economic growth. But as China continues to develop its economy and further deepens its reforms and opening-up, it might be not appropriate to maintain this huge surplus. While China s economy is entering into a new phase characterised by a domestic demand and consumptiondriven model, the growth of imports bodes well for mitigating the principal contradiction facing Chinese society in the new era, which is between the unbalanced and inadequate development and the people's ever-growing needs for a better life. Besides, increasing imports are also beneficial for the long-term stable growth of China s economy. Therefore, under the support of cutting tariffs and other related policy measures and the launch of CIIE, China is set to extensively import foreign goods and services in the following years. On this basis, China s economy will boast continuous and stable growth, a number of enterprises at home and abroad will embrace opportunities to develop at a faster rate, and people will enjoy a better life. Figure 11: Total value of China s imports and exports from 1978 to 2017 Unit: US $ 1 billion 2,500 2,000 1,500 1, China's exports China's imports Source: Collected by General Administration of Customs, P.R. China (GACC), NBS and PwC Figure 12: China s imports and exports as a share of GDP from 1978 to 2017 Unit: Percentage 40% 35% 30% 25% 20% 15% 10% 5% 0% China's exports/gdp Source: Collected by GACC, NBS and PwC China's import/gdp PwC 13

16 More specifically, President Xi Jinping said during the opening ceremony of the import expo, that China's imported goods and services are estimated to exceed US $30 trillion and US $10 trillion respectively in the next 15 years. In the short term, if the trade surplus of goods can be converted into a slight trade deficit, imports will post an annual increase of at least 1 trillion yuan. Taking the first three quarters of 2018 as an example, China s foreign trade in goods was valued at a total of trillion yuan, with the volume of exports and imports valued at trillion yuan and trillion yuan respectively as at the end of Q The trade surplus declined by 28.3% to 1.44 trillion yuan over the three quarters. In 2017, the trade surplus in goods reached 2.87 trillion yuan. Regardless of the trade deficit in services, which was CNY 1.62 trillion (the total volume of trade in services amounted to 4.70 trillion yuan of which the exports totalled 1.54 trillion yuan and the imports totalled 3.16 trillion yuan) for that year, China still reaped the deficit of over 1 trillion yuan in annual trade. In addition, the move to convert the trade surplus into a slight trade deficit will help relieve trade tensions with some countries, and it would also enable China to gain an international reputation for shouldering more responsibilities as the second largest economy. Moreover, the settlement of imports in yuan would promote the internationalisationof China s currency similar to the US. A good case in point is that the US dollar is used across the world as a reserve currency, and one of the major reasons is that US kept a long-term trade deficit. In particular, many countries along the Belt and Road hope to export more goods to China in order to boost their economic development. In this scenario, it is easier to settle using the yuan in these countries. 14

17 In longer term, imports of food, automobiles, and healthcare goods might grow substantially According to China International Import Expo Bureau, during the event which lasted six days, deals valued about US $57.83 billion were signed for the year ahead. More specifically, the deals signed included: US $16.46 billion of intelligent and high-end equipment US $12.68 billion of food and agricultural products US $11.99 billion of automobiles US $5.76 billion of medical devices and medical goods US $4.33 billion of consumer electronics and home appliances US $3.37 billion of clothing and consumer goods US $3.24 billion of services For the longer term, imported goods aimed to meet the domestic demand and the upgrading of consumption are expected to grow faster. Looking at China s current imports, it is mostly: raw materials (crude oil, coal, natural gas and mineral products), primary industrial products (pulp, refined oil, fuel oil, copper and copper, textile yarns, fabrics and products, primary plastic), medium and high-end industrial products (integrated circuits, automotive and automotive chassis and spare parts, LCD panels, automatic data processing equipment and components, pharmaceuticals, aircraft, diodes and similar semiconductor devices, steel metal processing machine tools), and agricultural products (cooking vegetable oils, cereals and flour, fresh or dried fruits, dried nuts and soybeans). Sorted by the value of these imported products, we can see there are great potential to increase goods that aim to meet domestic demand and the upgrading of consumption. For instance, in 2017: Imported value of integrated circuits and crude oil both exceeded 1 trillion yuan. More specifically, 1.76 trillion yuan for the integrated circuits and 1.10 trillion yuan for crude oil, billion yuan of iron ore and concentrates, More than 300 billion yuan of automobile and automobile chassis and spare parts, and plastic in primary forms, More than 200 billion yuan of soybean, unwrought copper and copper products, auto parts, LCD panels, More than 100 billion yuan of coal, pulp, steel, airplanes with loads weighing more than two tons, solid waste, textile yarns and fabrics products, pharmaceuticals, natural gas, copper ore and concentrates, More than 50 billion yuan of refined oil, natural and synthetic rubber, metal processing machine tools, Around 30 to 40 billion yuan of fresh and dried fruits and nuts, cereals and cereal powder, edible oils, and NO. 5-7 fuel oil. Obviously, most of these imports served China s industrial demand, and some to contribute to processing. However, China lacks imported goods that aim to promote the upgrading of consumption and improve people s livelihood. PwC 15

18 Take food for example, at present, levels of consumption have increased significantly, especially for the middle class, but domestic food safety issues occur once in a while. Therefore, the Chinese consumers are displaying a growing demand for high-quality food and agricultural products. As the world s most populous country, China will hopefully import large volumes of these products. Taking the first three quarters of 2018 as an example, the per capita food consumption (including tobacco and alcohol) in the country accounted for 28.5 percent of the per capita consumption expenditure. In terms of total retail sales of consumer goods, the total amount of food (including grain and oil, beverages, tobacco and alcohol) as well as catering reached 6.17 trillion yuan in 2017, comprising 16.8 percent of the total. Excluding catering consumption which have a slightly higher additional value, the total retail sales of food (including grain and oil, beverages, tobacco and alcohol) reached 2.2 trillion yuan, accounting for 6.02 percent. Compared with the total retail sales of domestic food and catering, imported food and agricultural products have great potential, albeit accounting for a relatively small share of total retail sales of consumer goods. China became the world's largest importer of food and agricultural products in In 2017, the country imported a total of US $58.3 billion of food, nearly 380 billion yuan calculated by the then dollar-to-yuan exchange rate of 6.5. This accounted for 6.16 percent of the total retail sales of food and catering in that year and for percent of the total retail sales of food in that year. It is also worth noting that when imported foods as a proportion of the total retail sales increases 1 percentage point, the value of food that China may need to import may be as high as US $10 billion. Automobiles are another example, as world s largest market, the future of automobile imports is also bright. For instance, in 2017, automobiles contributed 4.2 trillion yuan, or percent, to the total retail sales of consumer goods. At the same time, however, only 8.15 percent of the total retail sales of automobiles came from imported automobiles, that is, 1.24 million imported automobiles with a total turnover of billion yuan. As the tariffs on automobile imports (including complete vehicles and spare parts) are further reduced, imports may also rise sharply. Healthcare-related products, particularly pharmaceuticals and medical devices will also rise sharply in the coming years, as the demand for higher quality healthcare is increasing. In 2017, the value of imported pharmaceuticals went up to billion yuan and increased 24.1% compared to 2016, meanwhile the value of imported medical devices rose to 130 billion yuan and increased by 6.28 percent. On the other hand, China s per capita healthcare consumption expenditure was 1,451 yuan in 2017 (only about US $223, which is much less than many countries. This once again shows that China is still a developing country), which accounts for 7.9 percent of the total consumption expenditure. As a result, total healthcare consumption expenditure was more than 2 trillion yuan, and imported pharmaceuticals and medical devices account for a small portion of less than 16 percent. Thus, the potential is huge as healthcare expenditure has grown much faster than other sectors in the past few years. 16

19 Figure 13: Distribution of China s imported goods and services over time Imported goods Minerals and metals 6% Agricultural raw materials 8% Food 10% Fuel 1% Minerals and metals 5% Agricultural raw materials 5% Food 5% Fuel 7% Minerals and metals 10% Agricultural raw materials 3% Food 7% Fuel 11% Manufactured goods 75% Manufactured goods 78% Manufactured goods 69% Services Tourism 6% Transportati on 50% Finance and insurance 5% Computer, communications and other services 39% Tourism 29% Finance and insurance 5% Transportation 35% Computer, communications and other services 31% Tourism 57% Finance and insurance 4% Transportation 18% Computer, communications and other services 21% Source: Collected by GACC, NBS and PwC Conclusion: How should companies seize the opportunities? In conclusion, the import expo is a government-backed platform where enterprises perform while it is crucial for exhibitors to figure out how to meet market demands. As for how companies should seize the trend of a surge in China s imports, we offer the following suggestions: Every journey begins with a single step. The CIIE provides small and medium-sized enterprises worldwide with direct access to the Chinese market at a relatively low cost. To enter the market successfully, it is crucial to select a reputable channel, wholesale and agency partners, and going it alone may not be the best choice; Imported goods or services also need to be localised. The Chinese market, in which lifestyle habits such as food consumption vary from one place to another, is extremely different to Western markets. Given the huge differences, companies may need to conduct sufficient market research and surveys before importing food, apparel, accessories and consumer goods, and services, among others, on a large scale; China has surpassed most of the world s developed markets in fields such as e-commerce and mobile payments, therefore many business models that prevail in the West are being phased out in China. In this situation, foreign industry leaders and medium-sized companies seeking to make inroads into the Chinese market might face risks if they completely replicate their existing operating models. PwC 17

20 Author G. Bin Zhao Senior Economist PwC China +86 (21) Acknowledgements Special thanks to Thought Leadership and Research teams for their contributions to the report. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PwC. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. CN C1