Wednesday, May 15, 2019

With the slowdown in economic growth in recent years and the external pressure brought about by the U.S.-China trade conflict, the market has expressed pessimistic expectations for the Chinese economy in 2019. However, according to the macroeconomic data revealed by the authorities in the first quarter of this year, the economic growth rate in China was 6.4%, and this figure exceeded the market expectations. As a result, some are beginning to optimistically consider that China's economy has bottomed out and is beginning to rebound, and are also expecting that monetary policy will be tightened. This expectation, coupled with poor communication with regulators have led to a continuous decline in the capital market. Based on April's macroeconomic data revealed by the Chinese National Bureau of Statistics (NBS) on May 15, there is also an indication that it would be necessary to make a more objective assessment of the situation of the Chinese economy this year.

Statistics from the NBS showed that the added value of industrial enterprises above the designated size increased by 5.4% year-on-year in April, and the growth rate dropped by 3.1 percentage points from the previous month. It dropped 0.1 percentage points faster than that of January and February. From January to April, the added value of industrial enterprises above the designated size increased by 6.2% year-on-year, and the growth rate was similar to that of the previous year. In April, the total retail sales of consumer goods reached RMB 3,058.6 billion, a year-on-year increase of 7.2%, and the growth rate dropped by 1.5 percentage points from the previous month. From January to April, the country's fixed asset investment (excluding farmers) was RMB 1,574.7 billion, representing an increase of 6.1% year-on-year. The growth rate was 0.2 percentage points lower than that from January-March, similar to the growth rate from January-February, and 0.2 more than the previous year. Among them, private investment totaled RMB 9.3103 billion, an increase of 5.5%. In terms of industries, investment in the primary industry fell by 0.1% year-on-year. Investment in the secondary industry increased by 2.8%, of which investment in manufacturing industries increased by 2.5%. Investment in the tertiary industry increased by 7.9%, of which infrastructure investment increased by 4.4%. In April, the total volume of imports and exports was RMB 2,057.7 billion, a year-on-year increase of 6.5%, while being 2.7 percentage points down from the previous month in which the exports were RMB 1,300.6 billion, an increase of 3.1% while the imports were RMB 1,207 billion, up 10.3%. The trade surplus was RMB 93.6 billion, a year-on-year contraction of 43.8%.

If we look at this objectively, the macroeconomic data in April shows that the real performance was poorer than expectations. The decline in industrial growth may be due to the short-term impact brought about by VAT reform, but the 7.2% consumption growth rate has hit the lowest point since 2003. This also shows that the power of domestic demand is gravely insufficient. In addition, infrastructure investment, which has been highly anticipated, has grown at a flat rate and has not realized its high growth. While manufacturing investment continues to decline, it shows that real-economy enterprises are not optimistic about the economic outlook. These data also show that the foundation of Chinese economic stabilization is not solid and still faces significant downward pressure. Therefore, the expected growth in the first quarter may be a short-term performance. The market should not be overly optimistic, but should adopt a more objective attitude and expect that the Chinese economic situation will face more difficulties when assessing the matter.

Anbound's researchers believe that in the current situation, there are still huge internal and external pressures faced by the Chinese economy. From the domestic point of view, the transformation and upgrading of industry is slow, and there is also the lingering problem of overcapacity. For example, the problem of overcapacity in the steel industry has risen again this year, and its resulting profit has begun to drop sharply. Reducing capacity is also still a matter of urgency. The task of structurally reforming the supply-side is also of great importance. At the same time, China has yet to form a strong domestic market, and the demand remains weak. This is evident from the continuous and sharp decline in the Chinese domestic auto industry.

It is also particularly important to point out that the sudden changes in the U.S.-China trade talk have brought new uncertainties to the Chinese economy. The first thing that is being affected is China's foreign trade. Judging from foreign trade data released recently, many provinces and cities in China have seen a continuous decline in exports to the United States. At the same time, more regions in China are starting to turn to non-U.S. market. This transformation may require a certain transition period, and during such period many foreign trade companies will be affected. Secondly, the uncertainty of U.S.-China trade talk will also affect corporate investment. Many companies may reduce their investment in China or simply shift their companies out of China to reduce their risks. These measures will affect the employment level of China and the income of residents, which in turn affects China's domestic consumption levels. Lastly, the intensification of the trade friction will definitely hit China's financial market. In addition to suppressing the performance of the stock market, the most alarming risk is the trade friction triggering the depreciation of the RMB exchange rate, which would lead to a series of domino effects.

As far as this year is concerned, the downward pressure on the Chinese economy will remain. If China does its best to stimulate its economy in response to the downward pressure, it will have no problem in meeting its growth target of 6% to 6.5% in 2019. However, when 2020 and 2021 comes around, the Chinese economy may see another sharp decline. Therefore, in order to stabilize market confidence in the short term, China's macro policies need to maintain their focus and targets. Loose policies also should continue to be implemented. The focus of macro policies and the implementation of loose policies provide the means to support the short-term economic growth. In the medium and long term, it is necessary to press ahead with reform and opening-up, as well as solve the structural problems in the Chinese economy. These also means the quality of the Chinese economy should be improved. However, it should be noted that if the trade conflict between China and the United States worsens, it will bring new pressure on China's economy and force a re-evaluation of the future economic situation.

Final analysis conclusion:
The latest macroeconomic data released in April came in below expectations, which is in sharp contrast to the "higher than expected" data in the first quarter. This could mean that the assessment of China's economic situation this year should be more cautious and objective. The continued downward pressure on China's economy, coupled with the possible deterioration of China-U.S. trade frictions, will pose even greater challenges to China's economic policies.

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