Stable economy sets the stage for reforms in 28 While China s economic restructuring is in progress with government-led consolidation on excess capacity and measures to cool the housing market, export recovery and higher value-added industries are able to keep GDP growth stable in 27. This would enable more structural reforms to launch in 28 as China commemorate the 4th anniversary of its opening up policy. 27 GDP reveals transitions in China s economic structure Pace of economic growth rebounded in 27 Released on 9 January, China s gross domestic product (GDP) expanded by 6.9% year-on-year (YoY) in 27, above 6.7% YoY in 26. As the first time since 2 that the pace of China s GDP growth accelerated, the National Bureau of Statistics noted it is a sign that the economy is achieving stable and healthy development. A breakdown of the 27 economic data revealed the structural transitions in China s economy with the new drivers replacing the old drivers". As export recovery and resilient consumption support the development of higher value-added industries such as information technology and the tertiary sector, the governmentled consolidation of excess capacity in the commodity industry and curb down on the real estate market were the main drags.
Ppt Economic growth rebounded in 27. GDP growth GDP growth. 9. 9. 8. 8. 7. 7. 6. Dec- Jun- Dec- Jun-2 Dec-2 Jun- Dec- Jun-4 Dec-4 Jun- Dec- Jun-6 Dec-6 Jun-7 Dec-7 Information technology took a larger role in the economy By industry, the economy is backed by continued strength in the tertiary sector, particularly information technology and logistics, which contributed.9 percentage point (ppt) and.4 ppt to the headline GDP growth in 27, up from. ppt and. ppt respectively in 26. Meanwhile, contribution from real estate services and construction weakened to.4 ppt and. ppt respectively from.6 ppt and. ppt, likely from the government s measures to cool the overheated property market in the major coastal cities (see Finding long-term stability in China s housing market 2 February 28). Increasing contribution from information technology 7 6 4 2 Contribution to growth by by industry industry 26 27 Primary Manufacturing Construction Other secondary Wholesale & retail Logistics Accomodation & catering Financial Business services Other tertiary Real estate Information technology Exports more than compensated for the slowdown in investment By expenditure, economic growth was dragged by further slowdown in capital formation, which was the slowest since the government s CNY4t economic stimulus package in 29. However it was more than offset by rebounding external demand, which contributed.6 ppt to headline economic growth, the most since 27. Meanwhile, domestic consumption remained the largest contributor to growth at 4. ppt in 27. Stable economy sets the stage for reforms in 28 2
Ppt Export recovered with the most contribution since 27 Contribution to growth by by expenditure 9 7 - - - 2 26 27 28 29 2 2 22 2 24 2 26 27 Capital formation Consumption Net export With a closer look at capital formation through fixed asset investment (FAI), the slowdown was mainly the result of slowdown in real estate and state-owned enterprise (SOE) investment. The slowdown of SOE investment, in particular, was likely a response to the pressure for excess capacity consolidation in the commodity industry. On the other hand, investment on new manufacturing industries and the personal service sector remained strong. FAI slowed in 27 mainly due to weakening SOE spending 4 FAI FAI 2 2 4 28 29 2 2 22 2 24 2 26 27 FAI Private SOE FAI by industry 4 2 2 28 29 2 2 22 2 24 2 26 27 Real estate Manufacturing Infrastructure Personal service Stable economy sets the stage for reforms in 28
Exports benefitted from improving world economic condition, as shipment of Chinese merchandize to the major trade partners including US, Euro area, and Japan visibly improved in 27. The recovery, in particular, came more from the hi-tech and mechanical products than labour intensive items which likely are hurt by China s rising labour cost. Exports to the countries under the Belt and Road Initiative (BRI), meanwhile, was boosted by strong demand of capital goods. This is consistent with the increasing infrastructure investments along the routes in 27. Demand for Chinese exports improved across-the-board 4 Export Export by by destination 2 - -2 28 29 2 2 22 2 24 2 26 27 BRI US EU ASEAN Export by product group group 2 2 - - - -2 28 29 2 2 22 2 24 2 26 27 Hi-tech products M&E products Labour intensive products Meanwhile, domestic consumption remained resilient likely due to increase in real disposable income, better-than-expected economic condition, and positive wealth effect from the accumulated increase in housing price. By products, discretionary and luxury items such as cosmetics, jewellery, and recreational goods were market leaders. In 27, online sales rose by 2.2% YoY compared to the overall retail sales growth at.2% YoY, reflecting the change of consumer preference. Stable economy sets the stage for reforms in 28 4
%YoY YTD Retail sales remains broadly resilient with support from income growth Retail sales 2 2 2 2 22 2 24 2 26 27 Retail sales Merchandize Online Catering 9. 8. 8. 7. 7. 6. 6. Mar-4 Sep-4 Mar- Sep- Mar-6 Sep-6 Mar-7 Sep-7 Real disposable income per capita Real GDP Resilient growth creates more room for reform Robust export growth may continue The International Monetary Fund (IMF) also raised its forecast for China s economic growth in 28 to 6.6%YoY from 6.%YoY on 2 January on account of the more upbeat outlook for the global economy. Despite the concern for increasingly protectionist sentiment, world leaders have made clear during the World Economic Forum (WEF) that any unilateral decision from the US will not be well received. In any case, a full-blown trade war between China and the US is not a cost-effective tactic for either side, as China s consumer market may soon overtake that of the US to become the world s largest. Stable economy sets the stage for reforms in 28
USD t China s consumer market is too big to be ignored if trade tension escalates 6 Retail sales 4 2 28 29 2 2 22 2 24 2 26 27 China US Source: Wind, US Census Bureau, EY A wider window to further the reform agenda With the economy on more solid footing, the leadership has a wider window of opportunity to further its reform agenda and reduce financial risks. Liu He, head of the Central Leading Group for Financial and Economic Affairs and President Xi Jinping s chief economic advisor, addressed the WEF on 24 January that China will launch a fresh push for reforms consisting of measures that exceed the expectation of the international community. Without specifying the new reforms, he added that they are significant enough to celebrate the 4th anniversary of Deng Xiaoping s opening up policy. New measures on financial deleveraging On prevention of systemic financial risk, since the beginning of 28 the regulators have also announced new restrictions on leveraged bond trading, loan disguised as equity investment, and entrusted loan in an effort to crackdown on shadow banking. The control on local government finances have also tightened with the Ministry of Finance announcing new measures to eliminate unqualified public-private partnership (PPP) projects by March 28. Together, these measures may bring slower economic growth in 28 and beyond in return for more sustainable and higher quality development. Stable economy sets the stage for reforms in 28 6
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