As 2018 approached to its end, there has been official news that China's economic growth rate will reach 6.5% this year, and the GDP will exceed RMB 90 trillion (about USD 13.7 trillion). Thanks to the high economic growth of the previous years, the Chinese economy has already ranked second in the world in terms of volume and reached a stable magnitude. However, facing the complex changes in the international environment and the problems of the domestic economy, the Chinese economy in 2019 faces greater challenges. As predicted by Anbound China will have to work hard to maintain the 6.0% growth in 2019.
The Chinese economy faces many problems; different people would have different perspectives on what the key issues should be. Some say that the deterioration of the trade environment is the key issue, some consider it to be the financial problem, others are worried about debt risks, while certain quarters think the real estate problem would be the main concern. However, Anbound's researchers believe that the Chinese economy is currently lacking in strength and this is due to the problems in the real economy. Generally speaking, the "real economy" refers to the economic part other than the housing and the financial markets. In China, the term sometimes narrowly refers to industry, especially manufacturing.
According to the latest data released by the Chinese National Bureau of Statistics, China's industrial enterprises above designated size have the negative growth of -1.8% year-on-year in the previous month, with a previous value of 3.6%, showing a decline for the eighth consecutive month and the first negative growth in three years. From January to November, the total profits of industrial enterprises above designated size reached RMB 6,116.88 billion, a year-on-year increase of 11.8%. The growth rate slowed by 1.8% from 13.6% in January-October, and it also fell for the fifth consecutive month.
In terms of industries, in the 41 major industrial sectors, the total profit of 34 industries increased year-on-year, and 7 industries decreased. It is worth mentioning that the profit growth rate of oil extraction, steel, building materials, chemical industry, and special equipment manufacturing industry is relatively high. The contribution rate of these five industries to the profit growth of industrial enterprises above designated size is 76.6%. It can be seen that these five "most profitable" industries are concentrated in the fields of resources, raw materials, and intermediate products, which means that the profitability of industrial enterprises in the downstream manufacturing sector close to the consumer side may face much more difficulties.
The statistics also show that from January to November, the profit rate of the main business income of industrial enterprises above designated size was 6.48%, an increase of 0.16% year-on-year. From the three major categories of industry, the mining industry's profit margin was 13.04%, an increase of 3.27%; the manufacturing profit margin was 6.19%, an increase of 0.05%; the electricity, heat, gas and water production and supply industry profit margin was 6.11%, a decrease of 0.34%. The biggest factor affecting profit is cost; from January to November, the total cost and expenses per RMB 100 in main business income of industrial enterprises above designated size was RMB 92.56, a decrease of RMB 0.21 year-on-year.
Looking from the perspective of the nature of the enterprise, from January to November, the state-owned holding enterprises in industrial enterprises above designated size realized a total profit of RMB 1,088.7 billion, a year-on-year increase of 16.1%; collective enterprises realized a total profit of RMB 19.15 billion, an increase of 4.6%; The total profit was RMB 4,317.68 billion, an increase of 15.9%; the foreign, Hong Kong, Macao, and Taiwanese investment enterprises realized a total profit of RMB 1,538.68 billion, an increase of 4.2%; private enterprises realized a total profit of RMB 1,581.55 billion, an increase of 10%. In 2017, the profit growth rate of state-owned enterprises was 45%. From January to November 2018, it was only 16%. At the same time, collective enterprises increased from -8.5% to 4.6%. The shareholding system fell from 23% to 16%. Chinese analyst Deng Haiqing believed that the statistics show that this round of profit decline is mainly related to state-owned enterprises.
In November, the profits of industrial enterprises had negative growth. The growth rate of profits of industrial enterprises in the first 11 months continued to decline, which is a window to observe China's real economy. China was known to be the status of "world factory". Although this status has been weakened with the increase in comprehensive manufacturing costs, it still has a strong industrial volume and market influence in the manufacturing sector. More importantly, the comprehensive industrial system in China has also driven many other productions and lifestyle-oriented service industries, which constitute the "real economy" with greater impact and wider employment.
In contrast with the "real economy" that experiences slowdown or even decrease in domestic development in recent years, the growth rate of the "virtual economy" is rather robust. This is mainly reflected in the financial industry, real estate industry and some new types of industries represented by the new internet economy. The "virtual economy" sector has attracted a large amount of financial capital, which is mutually-strengthening, further exacerbating the "virtualization" of the Chinese economy. For example, the fact that financial resources are "disconnected from reality" in the flow direction is a prominent manifestation of this kind of "virtualization". In the future economic adjustment, the development of the real economy and the flow of economic resources to the real economy will be an important direction that needs to be promoted jointly by the policy and the market.
Final analysis conclusion:
The negative growth of Chinese industrial enterprises' profits and their continuous decline are a manifestation of the weakening of China's real economy. China will need to slow down the rapid development of the virtual economy and concentrate more economic resources in the real economy.
