Download Country Report China August 2015

______________________________________________________________________________
Country Report
China
Generated on August 14th 2015
Economist Intelligence Unit
20 Cabot Square
London E14 4QW
United Kingdom
______________________________________________________________________________
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ISSN 2047-4539
Symbols for tables
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1
China
China
Forecast
Highlights
Outlook for 2015-19
3
Political stability
4
Election watch
4
International relations
5
Policy trends
6
Fiscal policy
6
Monetary policy
7
International assumptions
8
Economic growth
8
Inflation
9
Exchange rates
9
External sector
9
Forecast summary
10
Quarterly forecasts
Data and charts
11
Annual data and forecast
12
Quarterly data
12
Monthly data
14
Annual trends charts
15
Quarterly trends charts
16
Monthly trends charts
17
Comparative economic indicators
Summary
17
Basic data
19
Political structure
Recent analysis
Politics
22
Analysis
Economy
24
Forecast updates
31
Analysis
Country Report August 2015
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© Economist Intelligence Unit Limited 2015
2
China
Highlights
Editor:
Tom Rafferty
Forecast Closing Date: July 30, 2015
Outlook for 2015-19
The president, Xi Jinping, appears dominant within the ruling Chinese
Communist Party. Political controls will remain tight in 2015-19, with changes
to the legal and judicial system representing the best hope for political
reform.
Mr Xi will pursue a proactive and muscular foreign policy in 2015-19. China
will try to use economic diplomacy to dampen tensions stemming from
regional territorial disputes, but with only partial success.
The government's unprecedented intervention in domestic stockmarkets
since June has prompted The Economist Intelligence Unit to scale back its
expectations for economic liberalisation in 2015-19.
We have raised our real GDP growth forecast to 6.9% in 2015, from 6.8%
previously, after better than anticipated second-quarter data. We have
trimmed our medium-term forecast to reflect diminished reform prospects.
Owing partly to lower global oil prices and excess supply in the economy,
we expect annual consumer price inflation to average 1.6% in 2015, while
producer prices will fall by 3.9%. Inflation will accelerate in 2016-18.
The renminbi is expected to remain flat against the US dollar in 2015, marking
a significant appreciation in real effective terms. With the local currency at a
more market-determined level, it will be subject to greater volatility in 201519.
Review
Dozens of lawyers and rights campaigners across the country were detained
or questioned by the Chinese authorities over the weekend of July 11th–
12th in what appears to have been a co–ordinated campaign against civil
activists.
The government passed an expansive new National Security Law on July
1st. The law's scope includes "welfare of the people, sustainable economic
and social development, and other major national interests".
In early July the authorities unveiled an extraordinary combination of
measures to halt downward shifts in domestic stockmarkets, including
broad-based, state-directed buying of shares and restrictions on share
selling.
Although the stockmarkets have stabilised, investor sentiment remains frail.
On July 27th the China Securities Regulatory Commission denied reports
that the authorities might be reducing their support for the markets.
Real GDP expanded by 7% year on year in April–June, unchanged from the
first quarter of the year, according to data released by the National Bureau of
Statistics (NBS) on July 15th.
The consumer price index increased by 1.4% year on year in June, compared
with 1.2% growth in May, according to data published on July 9th by the
NBS. The acceleration was largely attributable to higher pork prices.
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© Economist Intelligence Unit Limited 2015
3
China
Outlook for 2015-19
Political stability
The president, Xi Jinping, has secured more authority over the ruling Chinese
Communist Party (CCP) than anyone since Deng Xiaoping, the country’s
“paramount leader” between 1978 and 1992. His elevated standing has been
reflected by the purging of a former security tsar, Zhou Yongkang, who was
sentenced to life imprisonment in June for bribery, abuse of power and the
intentional disclosure of state secrets. There had been an understanding since the
1980s that the most senior officials—those who had served, as Mr Zhou had, on the
CCP’s top decision­making body, the politburo standing committee (PSC)—would
enjoy immunity from disciplinary charges. Mr Xi’s willingness to break this
consensus marks a clear departure from the “collective leadership” system
maintained under his predecessor, Hu Jintao.
Mr Zhou’s fall forms part of a broader campaign to tackle extra vagance and graft
among CCP officials. It is nominally aimed at improving standards of governance
and reining in abuses of power, but it also serves to quell dissent within the CCP
regarding the leadership’s agenda. Mr Xi’s approach is not without risks, and, if he
pursues other high-level targets, factional tensions within the CCP will rise.
Although the anti-corruption campaign is unlikely to be wound down suddenly, as
it has become a semi-institutionalised feature of Chinese politics, an investigation
into another figure of Mr Zhou's seniority is unlikely in the short term. Mr Xi will
want stability in the run-up to a scheduled reshuffle of the PSC in 2017, when he will
have an opportunity to promote favoured allies.
Meaningful political reforms are not on Mr Xi’s agenda; his aim is to strengthen the
CCP’s position. Although internal disciplinary processes will be made more
transparent in 2015-19, the CCP will not surrender power over regulation of its
members to external bodies, and corruption is consequently likely to remain
entrenched. Meanwhile, controls over the education system, non-governmental
organisations and the media, including online content, will be tightened, partly
under the auspices of the new National Security Law passed in early July. The
Chinese government’s increasing micromanagement of political developments in
Hong Kong will not reduce social unrest in the territory in 2015 19, but there is little
likelihood that political instability there will spread to mainland cities. The best hope
for political change in China over the next five years lies in reforms unveiled in
October 2014 to “advance the rule of law”. These include plans to make the courts
more independent and to professionalise the judiciary.
The CCP will remain firmly in control over the next five years. In an economic,
environmental or political crisis, anti-government forces could coalesce in a way
that the authorities would find hard to control without bloodshed, but this is not
The Economist Intelligence Unit’s core forecast. Chronic low­level instability will
continue as a result of disputes over issues such as land ownership and
environmental degradation, but such clashes tend to be highly localised. Labour
activism, especially in high-skill industries, could prove more troublesome but is
likely to remain manageable.
Separatist movements will remain weak, but instability will occasionally erupt in the
ethnic-minority regions of Tibet and Xinjiang, and related terrorist incidents are
likely to occur elsewhere in China. The separatist movement in Xinjiang has since
2013 borne the hallmarks of an organised insurgency. The Tibetan separatist
movement could grow more violent when the region’s ageing exiled spiritual leader,
the 14th Dalai Lama, dies. China’s government shows no sign of moderating its
tough approach towards separatist and ethnic unrest, although new policy
strategies are being discussed in official think-tanks.
Country Report August 2015
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4
China
Election watch
Following their appointment in 2013, Mr Xi and the premier, Li Keqiang, are set to
serve ten-year terms in office. They will also probably retain until 2022 their
positions on the seven-member PSC, in which they are ranked first and second
respectively. This puts them in an advantageous position relative to the
committee’s other current members, who will serve only single terms, retiring in 2017
in accordance with age limits. (There is a possibility that the anti-corruption tsar,
Wang Qishan, may be given an unusual extra term.)
International relations
Mr Xi wants an expanded international role for China and has set out a more
proactive and muscular foreign policy than the "low-profile" approach preferred by
his predecessors. This will mean no concessions over the regional territorial
disputes in which China is entangled. As a result, tensions between China and its
neighbours over territorial claims in the East and South China seas, as well as its
contested land border with India, will persist. In the probable absence of diplomatic
solutions to these problems, there is a risk that unintended military interactions or
political miscalculation could result in an armed clash in 2015-19. However, the
Chinese government's willingness to engage with Japan in discussions over crisis
prevention and mitigation in the East China Sea suggests that it wants to avoid
such an outcome.
China's government will use economic diplomacy to blunt criticism of its regional
manoeuvres and boost its global standing. Mr Xi’s so­called One Belt, One Road
initiative promises a significant boost in Chinese overseas direct investment in
Central, South-east and South Asia. A new, Chinese-dominated multilateral bank,
the Asian Infrastructure Investment Bank, the founding articles of which were
concluded in June, will further bolster China’s financial sway in the region. The
country will also strengthen its support for the multilateral institutions that it
favours and will remain a major provider of credit to developing countries. However,
with a few exceptions (such as Pakistan), China will lack firm allies of its own.
China will try to maintain a good working relationship with the US, despite periodic
diplomatic clashes and differences in the two countries' world views. Links with
Russia will strengthen in the next five years, but little in the way of mutual trust will
develop. As China’s overseas economic interests expand in 2015­19, it will play a
growing role in international security in fields such as diplomacy, peacekeeping and
anti-piracy patrols. However, it will remain only a minor player in global security
affairs compared with the US.
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© Economist Intelligence Unit Limited 2015
5
China
Policy trends
In 2013 the CCP unveiled a policy agenda aimed at reducing direct govern ment
interference in the economy and allowing market forces a “decisive” role in the
allocation of resources by 2020. In theory, the productivity gains unleashed by
these changes will create the conditions necessary for sustainable economic
expansion and social stability. However, many reforms are struggling to make
headway owing to bureaucratic hurdles and economic growth concerns. The
leadership has also shown itself to be uncomfortable with the implications of
economic liberalisation.
A dramatic intervention launched by the authorities to stabilise domestic
stockmarkets in early July was telling in this regard. Whatever the success of the
measures, the decision to pursue such a course represents a blow for reform efforts.
It killed hopes that China's stockmarkets would become driven by market
fundamentals or that moral hazard might be alleviated. There will also be broader
consequences for financial-sector reform, an area in which there had been steady
progress under the guardianship of the People's Bank of China (PBC, the central
bank). The government's determination to push through potentially destabilising
reforms, such as the full opening of the capital account and liberalisation of the
exchange rate, is less clear than before.
Other parts of the policy agenda are proceeding only hesitantly. To manage regional
debt the government has clamped down on local government fin anc
ing
vehicles (LGFVs) and is implementing a debt-restructuring programme. Yet a broader
realignment of the highly centralised fiscal system appears unlikely in 2015-19. In
the area of state-owned enterprise (SOE) reform, the government wants to raise the
efficiency of such firms, for example by allowing the market to play a greater role in
setting prices for their inputs and outputs and by encouraging more competition in
state-dominated sectors. However, it has promised to retain a "dominant role" for
the public sector. A prospective reform plan is likely to focus on consolidating
cen trally managed SOEs, an approach that is unlikely to raise productivity
substantially.
Social-justice issues, including the relaxation of the one-child policy, are another
part of the agenda. Steps have been taken to abolish the distinction between rural
and urban household registration (hukou) in smaller towns and cities. However,
such changes will be resisted by the largest municipalities owing to concerns about
how improved access to public services for former rural hukou holders will be
financed.
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© Economist Intelligence Unit Limited 2015
6
China
Fiscal policy
We forecast that the official consolidated central- and local-government budget
deficit in 2015-19 will be equivalent to around 2.8% of GDP on average, but there is a
high risk that fiscal shortfalls will exceed this level. Whereas the central
government’s fiscal position remains strong, many regional governments face
straitened circumstances amid a weakening in revenue from land sales and the
introduction of tougher regulatory controls on LGFVs. As the country’s leaders
look to reduce local governments’ reliance on borrowing from banks, they will
increase allocations from the centre to the regions and will tolerate larger deficits.
The national government will also stand behind those local administrations that face
financial crises.
As part of reforms to the system of public financing, local administrations will be
given increased leeway to issue bonds directly. In March the Ministry of Finance
announced that local governments would be allowed to swap as much as Rmb1trn
(US$163bn) in bank debt for bonds with a lower financing cost in 2015; in June this
quota was expanded further to Rmb2trn. Direct bond issuance should increase fiscal
transparency. However, the dependence of provincial governments on funding
allocations from the centre, coupled with the national government’s current
unwillingness to countenance defaults, will make it hard to price default risk
effectively.
Monetary policy
The PBC will aim to cool levels of credit growth in 2015-19 as it seeks to manage the
risks associated with a rise in corporate debt, but not at the expense of a sharp
slowdown in economic expansion. In late June it lowered its benchmark one-year
deposit and lending rates to 2% and 4.85% respectively—the fourth time that it has
cut rates since November 2014. These adjustments have been designed to alleviate
the financial strains that falls in producer prices have caused for many companies;
they do not mean that the PBC has abandoned its broader goal of curbing credit
expansion. Furthermore, with inflation set to accelerate in the remainder of 2015, we
believe that the rate-cutting cycle is over. However, additional moves to ease policy
via the relaxation of prudential requirements are possible.
A further priority for the PBC is interest-rate liberalisation. As part of this process, a
deposit-insurance scheme was introduced in May. Full liberalisation of interest rates
is likely to take place by early 2016. As inflation picks up in 2016-18, benchmark
interest rates will also edge higher. In the coming years the PBC will probably move
towards the use of one of the main interbank rates as a policy rate, with liquidity
injections being utilised to keep the rate at the preferred level.
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© Economist Intelligence Unit Limited 2015
7
China
International assumptions
Economic growth (%)
US GDP
OECD GDP
World GDP
World trade
Inflation indicators (% unless otherwise indicated)
US CPI
OECD CPI
Manufactures (measured in US$)
Oil (Brent; US$/b)
Non-oil commodities (measured in US$)
Financial variables
US$ 3-month commercial paper rate (av; %)
¥ 3­month money market rate (av; %)
¥:US$ (av)
Rmb:US$ (av)
Country Report August 2015
www.eiu.com
2014
2015
2016
2017
2018
2019
2.4
1.8
2.3
3.0
2.5
2.1
2.4
3.7
2.5
2.3
2.8
5.0
2.4
2.3
2.8
5.5
2.6
2.4
2.9
5.6
1.4
1.9
2.5
5.6
1.6
1.6
-0.3
98.9
-5.3
0.2
1.5
0.4
60.2
-13.1
2.1
1.9
1.5
69.3
5.5
2.3
2.2
1.9
79.9
6.6
2.5
2.2
1.2
86.4
2.6
2.0
2.0
1.4
89.3
2.7
0.1
0.3
1.2
2.6
3.4
4.1
0.2
0.2
0.1
0.7
1.7
1.8
105.9
6.14
122.1
6.13
124.4
6.12
124.0
6.09
122.0
6.10
120.0
6.13
© Economist Intelligence Unit Limited 2015
8
China
Economic growth
The government will maintain supportive monetary and fiscal policies to ensure that
economic expansion reaches its target of "about 7%" in 2015. Volatility in domestic
stockmarkets is expected to have only limited implications for the real economy,
given the limited exposure of households and the small role played by equity
markets in providing corporate financing. We have raised our real GDP growth
forecast to 6.9% in 2015, from 6.8% previously, following the release of better than
expected second-quarter economic growth figures.
Nevertheless, the increasingly cloudy outlook for reform has prompted us to trim
our medium-term forecasts, and we now think that economic growth will decelerate
to 5.6% by 2019. This will reflect a structural rather than a cyclical shift. This will be
partly related to demography, as China’s working­age population is already
shrinking. However, a more important factor will be the need to rebalance the
economy, after several years during which economic expansion has been overly
dependent on rapid credit growth, channelled largely into investment. Although
financial deleveraging is still some way off, even reining in credit expansion will
slow the pace of investment growth. Much of the deceleration will be concentrated
in housing construction. Household consumption, supported by rising incomes,
should hold up better, despite tighter credit conditions. Meanwhile, the contribution
of the external sector to economic expansion will fall after 2015 as import growth
recovers.
We continue to believe that the economy will avoid a hard landing. However, there
are downside risks to China's economic trajectory. The biggest of these revolve
around the level of oversupply in the property market (and the possibility of a
house price crash), as well as the danger that problems in the financial sector could
lead to a slump in lending.
Economic growth
2014a
GDP
Private consumption
Government consumption
Gross fixed investment
Exports of goods & services
Imports of goods & services
Domestic demand
Agriculture
7.4c
4.1c
2015b
6.9
7.1
7.0
3.8
4.9
-1.4
3.9
3.5
2016b
6.5
7.0
6.7
5.0
6.5
5.8
6.2
3.3
2017b
6.1
6.9
7.2
4.7
6.1
6.3
6.2
3.2
2018b
5.9
6.8
6.9
4.5
5.6
5.8
6.0
3.3
2019b
5.6
6.5
6.7
4.3
5.5
5.3
5.6
3.0
Industry
7.3c
6.2
6.0
5.7
5.5
8.4
7.5
6.9
8.1c
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.
6.3
6.8
6.3
%
7.7
4.6
7.5
5.2
4.2
7.2
Services
Inflation
The sharp drop in global oil prices in late 2014 will feed into weaker consumer price
inflation in 2015, when it is expected to average 1.6%, compared with 2.1% in 2014.
International petroleum prices have a strong influence on local food and transport
costs. Downward pressures on inflation will also stem from over capacity in China’s
industrial and property sectors. We expect annual inflation to accelerate modestly in
2016-19, to 2.8% on average, as excess capacity is curbed through tighter credit
policies and as global oil prices rise.
Producer prices will fall for a fourth successive year in 2015, declining by a worrying
3.9%. However, as excess capacity is eroded, upward pressures on prices will return.
Such pressures will be boosted by increases in utility costs and oil prices, as well as
higher wages. Producer prices will rise by 2.5% a year on average in 2016-19.
Country Report August 2015
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© Economist Intelligence Unit Limited 2015
9
China
Exchange rates
The renminbi is expected to remain basically flat against the US dollar in 2015,
representing a substantial appreciation in real effective trade-weighted terms, given
declines in the value of the yen and euro. The government is unlikely to force the
currency lower in response to the depreciation of the currencies of its trading rivals.
China’s financial authorities remain committed in the long term to scaling back
exchange-rate intervention, as this is tied to policy goals such as rebalancing the
economy and internationalising the renminbi. We forecast that the currency will
appreciate again in 2016-17, before weakening in 2018-19 as the current-account
balance moves towards deficit. Further widening of the renminbi's daily trading
band is possible in 2015-19, but the PBC will continue to intervene to smooth
volatility, meaning that the full width of the band will rarely be exploited.
External sector
We forecast that China’s current­account surplus will move from the equivalent of
3.5% of GDP in 2015 to 0.2% by 2019. Merchandise exports will rise in value terms
by 4.8% a year on average in 2015-19. The value of goods imports will contract
steeply in 2015 because of a combination of weak demand and lower global
commodity prices, but will increase by 10% a year on average in 2016-19. A growing
proportion of imports will be used for domestic consumption rather than in exportoriented manufacturing.
Despite strong growth in exports of services, driven partly by Chinese firms’ work
on construction projects abroad, the services deficit will widen sharply in 2015-19.
This will reflect a surge in overseas travel by Chinese tourists and the liberalisation
of services trade in the next five years. The deficit on the secondary income account
will also increase as foreigners remit more earnings from China and as wealthy local
citizens send greater amounts of funds offshore. Controls on inbound and
outbound capital flows will be relaxed as the authorities try to make the renminbi an
international currency.
Forecast summary
Forecast summary
(% unless otherwise indicated)
Real GDP growth
Industrial production growth
Gross agricultural production growth
Unemployment rate (av)
Consumer price inflation (av)
Consumer price inflation (end-period)d
Short-term interbank rate (end-period)
Government balance (% of GDP)
Exports of goods fob (US$ bn)
Imports of goods fob (US$ bn)
Current-account balance (US$ bn)
Current-account balance (% of GDP)
2014a
7.4
8.3
4.1
2015b
6.9
6.5
3.5
4.2
4.1c
2.1
1.6
1.6
1.7
5.6
4.9
-1.8
-2.6
2,226.6c 2,270.2
1,804.4c 1,580.5
2016b
6.5
6.2
3.3
4.1
2.2
2.3
5.4
-2.9
2,401.6
2017b
6.1
6.0
3.2
4.0
2.9
3.2
5.6
-2.9
2,547.8
2018b
5.9
5.7
3.3
3.9
3.2
3.7
6.0
-2.9
2,689.7
2019b
5.6
5.5
3.0
3.9
3.0
3.5
6.2
-2.9
2,815.5
1,721.4
1,935.2
2,137.1
2,312.6
189.1c
395.5
339.9
226.4
121.2
26.8
1.8c
3.5
2.8
1.7
0.9
0.2
External debt (end-period; US$ bn)
957.5c 1,017.4 1,130.4 1,296.0 1,451.9 1,589.1
Exchange rate Rmb:US$ (av)
6.14
6.13
6.12
6.09
6.10
6.13
Exchange rate Rmb:US$ (end-period)
6.12
6.14
6.09
6.08
6.12
6.13
Exchange rate Rmb:¥100 (av)
5.80
5.02
4.92
4.91
5.00
5.10
Exchange rate Rmb:€ (end­period)
7.43
6.02
6.09
6.80
7.20
7.39
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. d Seasonally
adjusted.
Country Report August 2015
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© Economist Intelligence Unit Limited 2015
10
China
Quarterly forecasts
Quarterly forecasts
2014
2015
2016
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
GDP
% change, quarter on quarter
% change, year on year
Consumer prices
% change, quarter on quarter
% change, year on year
Producer prices
% change, quarter on quarter
% change, year on year
Exchange rate Rmb:US$
Average
End-period
Interest rates (%; av)
Money market rate
Country Report August 2015
1.6
7.4
1.9
7.5
2.0
7.3
1.7
7.3
1.3
7.0
1.9
7.0
1.8
6.9
1.6
6.8
1.2
6.7
1.7
6.4
1.8
6.4
1.7
6.6
0.3
2.3
0.5
2.3
0.6
2.1
0.3
1.6
0.1
1.4
0.7
1.5
0.7
1.6
0.3
1.7
0.5
2.2
0.7
2.3
0.6
2.2
0.3
2.2
-0.3
-2.1
-0.6
-1.5
-0.5
-1.3
-1.3
-2.7
-2.2
-4.5
-0.8
-4.7
0.1
-4.0
0.6
-2.2
0.4
0.3
0.5
1.6
1.1
2.7
1.0
3.1
6.12 6.16 6.16 6.14 6.14 6.12 6.13 6.14 6.13 6.13 6.11 6.11
6.15 6.15 6.15 6.12 6.14 6.11 6.14 6.14 6.13 6.12 6.11 6.09
5.8
5.0
4.8
4.9
www.eiu.com
5.3
4.3
3.5
3.7
3.9
4.1
4.3
4.6
© Economist Intelligence Unit Limited 2015
11
China
Data and charts
Annual data and forecast
GDP
Nominal GDP (US$ bn)
Nominal GDP (Rmb bn)
2010a
2011a
2012a
6,005
7,442
8,471
2014b
2015c
2016c
9,519 10,432a
58,974 64,080a
11,220
12,121
68,811
74,183
Real GDP growth (%)
Expenditure on GDP (% real change)
Private consumption
10.4
9.3
7.7
7.7
7.4a
6.9
6.5
9.4b
11.1b
8.1b
6.7b
7.7
7.1
7.0
Government consumption
9.2b
11.8b
8.2b
7.0b
4.6
7.0
6.7
12.6b
8.6b
8.7b
9.1b
7.5
3.8
5.0
9.2b
9.6b
9.5b
11.5b
5.2
4.9
6.5
13.0b
11.5b
8.9b
11.6b
4.2
-1.4
5.8
4.3
4.2
4.5
3.8
4.1a
3.5
3.3
12.7
10.6
8.2
7.9
7.3a
6.3
6.2
8.4
7.5
Gross fixed investment
Exports of goods & services
Imports of goods & services
Origin of GDP (% real change)
Agriculture
Industry
Services
Population and income
Population (m)
GDP per head (US$ at PPP)
Fiscal indicators (% of GDP)
General government revenue
40,658 48,086 53,474
2013a
9.7
9.5
8.0
8.3
8.1a
1,334b
1,339b
1,345b
1,350b
1,356
1,361
1,366
9,177b
10,232b
11,331b
12,408b
13,466
14,334
15,453
20.4
21.6
21.9
21.9
21.9a
21.9
22.1
24.5
25.0
General government expenditure
22.1
22.7
23.6
23.8
23.7a
General government balance
-1.7
-1.1
-1.6
-1.9
-1.8a
-2.6
-2.9
Net public debt
Prices and financial indicators
Exchange rate Rmb:US$ (end-period)
16.6
15.0
14.5
14.7
14.9a
16.9
19.0
6.62
6.30
6.29
6.10
6.12a
6.14
6.09
Exchange rate ¥:Rmb (end­period)
8.85
8.15
8.29
8.41
7.43a
6.02
6.09
Consumer prices (end-period; %)
Producer prices (av; % change)
Stock of money M1 (% change)
4.5
5.5
20.4
4.1
6.0
8.7
2.4
-1.7
6.5
2.6
-1.9
9.3
1.6a
-1.9
3.2a
1.7
-3.9
4.5
2.3
1.9
4.4
Stock of money M2 (% change)
18.9
17.3
14.4
13.6
11.0a
10.6
10.4
5.8
6.6
6.0
6.0
5.6a
4.9
5.4
Lending interest rate (end-period; %)
Current account (US$ bn)
Trade balance
Goods: exports fob
Goods: imports fob
Services balance
Primary income balance
Secondary income balance
Current-account balance
External debt (US$ bn)
Debt stock
Debt service paid
Principal repayments
Interest
International reserves (US$ bn)
Total international reserves
a
245.5
236.0
297.7
351.8
422.2
689.7
680.3
1,476.2 1,805.9 1,972.1 2,147.5 2,226.6 2,270.2 2,401.6
-1,230.7 -1,569.9 -1,674.4 -1,795.8 -1,804.4 -1,580.5 -1,721.4
-22.5
-54.1
-65.9 -116.4 -183.0 -223.3 -262.1
-25.9
-70.3
-19.9
-43.8
-20.8
-39.2
-44.2
40.7
24.5
3.4
-8.7
-29.4
-31.6
-34.2
237.8
136.1
215.4
182.8
189.1
395.5
339.9
559.8
60.4
27.2
33.2
710.2
74.0
36.3
37.7
750.7
74.5
35.5
38.9
874.5
38.7
33.4
5.3
957.5 1,017.4 1,130.4
51.5
71.1
95.2
36.9
41.2
44.9
14.6
29.9
50.3
2,875.9 3,212.6 3,340.9 3,849.4 3,869.0a 3,625.8 3,551.9
Actual. Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
b
Source: IMF, International Financial Statistics.
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China
Quarterly data
2013
3 Qtr
2014
4 Qtr
1 Qtr
2015
2 Qtr
3 Qtr
4 Qtr
1 Qtr
2
Qtr
Output
Real GDP (% change, year on year)
7.9
7.6
7.4
7.5
7.3
7.3
7.0 7.0
Industrial production, gross value added
10.1
10.0
8.7
8.9
8.0
7.6
6.4 6.3
(1990 prices; % change, year on year)
Electricity production (% change, year on
11.6
10.1
7.8
7.3
3.2
2.7
3.0 3.9
year)
Prices
Consumer prices (2005=100)
128.9 129.8 130.2 130.8 131.6 131.9 132.0132.9
Consumer prices (% change, year on year)
2.7
2.9
2.3
2.3
2.1
1.6
1.4 1.5
Financial indicators
Exchange rate Rmb:US$ (av)
6.17
6.13
6.12
6.16
6.16
6.14
6.14 6.12
Exchange rate Rmb:US$ (end-period)
6.15
6.10
6.15
6.15
6.15
6.12
6.14 6.11
Deposit rate (end-period; %)
3.0
3.0
3.0
3.0
3.0
2.8
2.5 2.0
Prime lending rate (end-period; %)
6.0
6.0
6.0
6.0
6.0
5.6
5.4 4.9
3-month interbank rate (av; %)
5.3
6.0
5.8
5.0
4.8
4.9
5.3 n/a
Total loans (% change; year on year)
14.6
13.9
13.7
13.7
13.0
13.3
14.2 13.9
Short-term loans (% change; year on year)
19.3
16.3
15.6
14.5
10.6
7.9
n/a n/a
Medium- & long-term loans (% change; year
12.5
12.8
13.2
13.8
13.2
15.0
n/a n/a
on year)
Urban & rural savings deposits (% change;
14.6
13.5
11.4
12.0
9.2
9.0
8.9 n/a
year on year)
M1 (end-period; Rmb bn)
31,233 33,729 32,768 34,149 32,722 34,806 33,721 n/a
M1 (% change, year on year)
8.9
9.3
5.4
8.9
4.8
3.2
2.9 n/a
M2 (end-period; Rmb bn)
107,738110,653116,069120,959120,205122,837127,533 n/a
M2 (% change, year on year)
14.2
13.6
12.1
14.7
11.6
11.0
9.9 n/a
Shanghai “A” share price index (end­period;
2,276 2,214 2,129 2,145 2,475 3,389 3,9284,480
Feb 21st 1992=100)
Shanghai “A” share price index (% change,
4.2
-6.8
-9.1
3.5
8.7
53.1
84.5108.9
year on year)
Sectoral trends (% change, year on
year)
Retail sales, consumer goods
13.4
13.5
12.0
12.3
11.9
11.7
13.9 14.1
Foreign trade (US$ bn)
Exports fob
561.8 594.9 491.3 570.8 635.1 646.1 513.8558.4
Imports cif
-501.6 -505.1 -473.7 -483.9 -506.9 -496.1 -390.3
418.9
Trade balance
60.2
89.8
17.6
86.9 128.3 150.0 123.5139.5
Capital flows (US$ bn)
Foreign direct investment
74.0 126.4
93.2
90.6 109.1
n/a
n/a n/a
Foreign direct investment (% change, year
19.2
29.6
37.3
13.7
47.4
n/a
n/a n/a
on year)
Reserves excl gold (end-period)
3,681 3,840 3,966 4,011 3,905 3,859 3,7453,709
Sources: IMF, International Financial Statistics; China Statistical Information Centre; National Bureau of Statistics, China
Monthly Economic Indicators; People's Bank of China, Quarterly Statistics Bulletin.
Monthly data
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Exchange rate Rmb:US$ (av)
2013
6.28
6.28
6.27
6.25
6.20
6.17
6.17
6.17
6.16
6.14
6.14
6.12
2014
6.10
6.11
6.14
6.16
6.16
6.16
6.16
6.16
6.15
6.14
6.14
6.12
2015
6.13
6.13
6.15
6.13
6.11
6.12
n/a
n/a
n/a
n/a
n/a
n/a
Exchange rate Rmb:US$ (end-period)
2013
6.28
6.28
6.27
6.22
6.18
6.18
6.18
6.17
6.15
6.14
6.13
6.10
2014
6.11
6.12
6.15
6.16
6.17
6.15
6.17
6.16
6.15
6.15
6.13
6.12
2015
6.14
6.15
6.14
6.11
6.12
6.11
n/a
n/a
n/a
n/a
n/a
n/a
Real effective exchange rate (2005=100; CPI basis)
2013 119.54 121.29 122.92 124.55 126.28 126.96 128.08 127.88 127.73 126.60 127.36 128.11
2014 129.26 128.76 127.99 126.21 126.29 126.45 126.59 127.75 130.07 132.11 135.67 138.78
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2015 141.71 142.72 144.75 144.67
n/a
n/a
n/a
n/a
Money supply M1 (% change, year on year)
2013
15.3
9.5
11.8
11.9
11.3
9.0
9.7
9.9
2014
1.2
6.9
5.4
5.5
5.7
8.9
6.7
5.7
2015
10.5
5.6
2.9
3.7
n/a
n/a
n/a
n/a
Money supply M2 (% change, year on year)
2013
15.9
15.2
15.7
16.1
15.8
14.0
14.5
14.7
2014
13.2
13.3
12.1
13.2
13.4
14.7
13.5
12.8
2015
10.6
11.1
9.9
9.6
n/a
n/a
n/a
n/a
Deposit rate (end-period; %)
2013
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
2014
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
2015
2.8
2.8
2.5
2.5
2.3
2.0
n/a
n/a
Prime lending rate (end-period; %)
2013
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
2014
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
2015
5.6
5.6
5.4
5.4
5.1
4.9
n/a
n/a
Industrial production (% change, year on year)
2013
9.9
9.9
8.9
9.3
9.2
8.9
9.7
10.4
2014
8.6
8.6
8.8
8.7
8.8
9.2
9.0
6.9
2015
6.8
6.8
5.6
5.9
6.1
6.8
n/a
n/a
Retail sales of consumer goods (% change, year on year)
2013
12.3
12.3
12.7
12.8
13.0
13.5
13.5
13.4
2014
11.8
11.8
12.2
11.9
12.5
12.4
12.2
11.9
2015
13.5
13.5
14.8
13.6
13.9
14.7
n/a
n/a
Shanghai “A” share price index (end­period; Feb 21st 1992=100)
2013
2,497 2,476 2,341 2,280 2,408 2,071 2,087 2,196
2014
2,128 2,153 2,129 2,121 2,135 2,145 2,305 2,321
2015
3,364 3,469 3,928 4,654 4,829 4,480
n/a
n/a
Consumer prices (av; % change, year on year)
2013
2.4
2.6
2.0
2.3
2.1
2.6
2.6
2.5
2014
2.3
2.1
2.4
1.8
2.5
2.4
2.4
2.1
2015
1.2
1.7
1.3
1.7
1.4
1.5
n/a
n/a
Producer prices (av; % change, year on year)
2013
-1.7
-1.6
-1.9
-2.7
-2.9
-2.8
-2.3
-1.7
2014
-1.7
-2.1
-2.4
-2.0
-1.5
-1.1
-0.9
-1.2
2015
-4.2
-4.7
-4.5
-4.6
-4.6
-4.8
n/a
n/a
Total exports fob (US$ bn)
2013
187.3 139.3 182.1 186.9 182.7 174.2 185.9 190.6
2014
207.1 114.1 170.1 188.4 195.6 186.8 212.9 208.5
2015
200.2 169.1 144.5 176.3 190.1 192.0
n/a
n/a
Total imports cif (US$ bn)
2013
159.3 124.5 183.1 168.7 162.1 147.1 168.3 162.5
2014
175.1 136.6 162.1 169.7 159.3 154.9 165.6 158.6
2015
140.3 108.6 141.5 142.2 131.2 145.5
n/a
n/a
Trade balance fob-cif (US$ bn)
2013
28.0
14.8
-1.0
18.1
20.5
27.1
17.6
28.0
2014
32.0 -22.5
8.0
18.7
36.3
31.9
47.4
49.8
2015
60.0
60.5
3.0
34.1
58.9
46.5
n/a
n/a
Foreign-exchange reserves excl gold (US$ bn)
2013
3,430 3,415 3,462 3,553 3,533 3,515 3,567 3,571
2014
3,885 3,932 3,966 3,997 4,002 4,011 3,984 3,986
2015
3,829 3,817 3,745 3,763 3,726 3,709
n/a
n/a
n/a
n/a
n/a
n/a
8.9
4.8
n/a
8.9
3.2
n/a
9.4
3.2
n/a
9.3
3.2
n/a
14.2
11.6
n/a
14.3
12.1
n/a
14.2
12.0
n/a
13.6
11.0
n/a
3.0
3.0
n/a
3.0
3.0
n/a
3.0
2.8
n/a
3.0
2.8
n/a
6.0
6.0
n/a
6.0
6.0
n/a
6.0
5.6
n/a
6.0
5.6
n/a
10.2
8.0
n/a
10.3
7.7
n/a
10.0
7.2
n/a
9.7
7.9
n/a
13.3
11.6
n/a
13.5
11.5
n/a
13.7
11.7
n/a
13.4
11.9
n/a
2,276
2,475
n/a
2,242
2,534
n/a
2,324
2,810
n/a
2,214
3,389
n/a
3.0
1.8
n/a
3.2
1.7
n/a
3.0
1.6
n/a
2.6
1.6
n/a
-1.4
-1.8
n/a
-1.6
-2.2
n/a
-1.5
-2.7
n/a
-1.4
-3.3
n/a
185.3
213.7
n/a
185.4
206.9
n/a
202.2
211.6
n/a
207.4
227.6
n/a
170.8
182.6
n/a
154.4
161.4
n/a
168.5
157.0
n/a
182.3
177.7
n/a
14.5
31.1
n/a
31.0
45.5
n/a
33.7
54.6
n/a
25.1
49.8
n/a
3,681
3,905
n/a
3,755
3,870
n/a
3,808
3,864
n/a
3,840
3,859
n/a
Sources: IMF, International Financial Statistics; Haver Analytics.
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Annual trends charts
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Quarterly trends charts
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Monthly trends charts
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China
Comparative economic indicators
Basic data
Land area
9,561,000 sq km
Population
1.36bn (2013; official estimate)
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China
Main towns
Population (millions) of metropolitan areas. (2013; Economist Intelligence Unit
Access China estimates)
Shanghai: 22.0
Beijing (capital): 18.1
Shenzhen: 11.3
Guangzhou: 10.3
Tianjin: 10.0
Chongqing: 8.5
Wuhan: 8.3
Dongguan: 7.8
Foshan: 7.3
Chengdu: 6.8
Nanjing: 6.3
Shenyang: 5.9
Climate
Continental, with extremes of temperature; subtropical in the south-east
Weather in Shanghai (altitude 4 metres)
Hottest months, July and August, 23­33°C (average daily minimum and maximum);
coldest month, January, ­1 to 9°C; driest month, September, less than 5 mm average
rainfall; wettest month, June, 160-165 mm average rainfall
Language
Mainly putonghua, or Standard Chinese, based on northern Chinese (the Beijing
dialect known as Mandarin); local dialects and languages are also used
Measures
The metric system is used alongside certain standard Chinese weights and
measures, of which the most common are:
1 jin = 0.5 kg 2,000 jin = 1 tonne
1 dan = 50 kg 20 dan = 1 tonne
1 mu = 0.0667 ha 15 mu = 1 shang = 1 ha
Currency
Renminbi (Rmb), or yuan. Rmb1 = 10 jiao = 100 fen. Average exchange rate in 2014:
Rmb6.14:US$1
Fiscal year
January-December
Time
8 hours ahead of GMT
Public holidays
January 1st­3rd (New Year); February 18th­24th (Chinese New Year); April 4th 6th
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(Qingming Festival); May 1st-3rd (Labour Day); June 20th-22nd (Dragon Boat
Festival); September 26th-27th (Mid-Autumn Day); October 1st-7th (National Day).
All public holidays are technically one day long, except for Chinese New Year and
National Day, which are three days long. When the holiday covers weekdays in
excess of this figure, they are compensated for by working weekends around the
holiday
Political structure
Official name
People’s Republic of China
Form of government
One-party rule by the Chinese Communist Party (CCP)
The executive
The State Council, whose membership is approved by the legislature; State Council
members, including the premier, may serve no more than two consecutive five-year
terms
Head of state
A president and a vice-president are approved by the legislature for a maximum of
two consecutive five-year terms
National legislature
The unicameral National People’s Congress (NPC), whose 2,989 delegates are
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China
selected by provinces, municipalities, autonomous regions and the armed forces;
the NPC approves the president and members of the State Council, as well as the
membership of the standing committee of the NPC, which meets when the NPC is
not in session; all arms of the legislature and the executive serve five-year terms
Regional assemblies and administrations
There are 22 provinces, four municipalities directly under central government
control and five autonomous regions. All of these different types of regional
administration elect local people’s congresses and are administered by people’s
governments
National elections
A new party leadership was unveiled at the 18th national congress of the CCP in
November 2012, and the current government line-up was approved at the NPC
meeting in March 2013. The next major reshuffles of the CCP leadership and the
government line-up are due in 2017 and 2018 respectively
National government
The politburo (political bureau) of the CCP decides on policy and controls all
administrative, legal and executive appointments; the seven-member politburo
standing committee is the focus of power
Main political organisation
The CCP, of which Xi Jinping is the general secretary
Politburo standing committee members
Xi Jinping
Li Keqiang
Zhang Dejiang
Yu Zhengsheng
Liu Yunshan
Wang Qishan
Zhang Gaoli
Heads of selected state ministries and
commissions
President: Xi Jinping
Vice-president: Li Yuanchao
Premier: Li Keqiang
Vice-premiers: Zhang Gaoli
Liu Yandong
Wang Yang
Ma Kai
Commerce: Gao Hucheng
Finance: Lou Jiwei
Foreign affairs: Wang Yi
National Development & Reform Commission: Xu Shaoshi
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China
Central bank governor
Zhou Xiaochuan
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Recent analysis
Generated on August 14th 2015
The following articles have been written in response to events occurring since our most recent forecast was released, and
indicate how we expect these events to affect our next forecast.
Politics
Analysis
August 7, 2015
A brighter outlook for Sino-Pakistani economic ties
For decades China has regarded Pakistan as its "all–weather friend", providing
the Pakistani government with diplomatic support, as well as technical and
financial assistance. Despite the mutual goodwill, the unstable security situation
in Pakistan has caused significant disruption to the relationship over the past
years. However, the visit of China's president, Xi Jinping, to Pakistan's capital,
Islamabad, in April has breathed new life into political and economic ties.
It took Mr Xi and Pakistan's prime minister, Nawaz Sharif, more than two years to
co–ordinate an official visit. The visit had originally been scheduled for
September 2014, but was, embarrassingly, called off at the last minute owing to large
protests against the Pakistani government in Islamabad. Much to the chagrin of
Islamabad's political establishment, on that occasion Mr Xi still went to India where
he signed a number of infrastructure and investment deals.
Economics trumped by politics
The inability of Pakistani officials to protect Chinese workers in the country or stem
the rise of militant Islam that has threatened to spill over into Western China has
added to a sense of frustration for China. Pakistan's fragile security situation has
also hindered the development of economic ties, despite rhetoric to the contrary.
Indeed, past announcements of big investment deals, such as plans to build a
transport and energy corridor through Pakistan, were not reflected in rising Chinese
investment into Pakistan. China's foreign direct investment (FDI) in Pakistan topped
US$2bn in 2012, according to data from the UN Conference on Trade and
Development, and is roughly equivalent to China's FDI in Thailand or Cambodia.
Even though two–way trade has increased more than fivefold in a decade, from
US$3bn in 2004 to US$16bn in 2014, it remains heavily skewed in China's favour.
Pakistan's lagging manufacturing sector has been unable to cope with local
consumer demand, leaving a gap that is increasingly filled by China. Total bilateral
trade pales in comparison with China's US$60bn trade with India, or the US$70bn
flow of goods with Thailand, and is unlikely to see a significant increase unless
Pakistan manages to broaden its exports to China.
A unique opportunity for Pakistan
Mr Xi's visit to Islamabad in April highlighted the strength of the relationship,
which is unlikely to weaken significantly in the medium term owing to both
countries' need to balance against India. The two countries inaugurated the
landmark China–Pakistan Economic Corridor (CPEC), a Chinese investment package
estimated at US$46bn that is to become operational in 2020, which aims to revamp a
network of roads, railways, power plants and pipelines. Bringing both countries
closer together, CPEC will connect China's Xinjiang province with the deep–water
Pakistani port of Gwadar, which was developed with Chinese assistance. The port
also has geopolitical significance, as it would allow China to import oil directly via a
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China
land corridor from Pakistan to Xinjiang, thereby bypassing a potential maritime
chokepoint at the Malacca Strait.
Crucially for its long–term economic prospects, Pakistan could see a much–needed
lift in power generation capacity under CPEC. Underscoring the importance of
energy, roughly US$37bn of the investments in the corridor is earmarked for coal–
fired power plants, hydropower plants and solar parks. Funding for a stalled–gas
pipeline connecting Iran to Pakistan is also part of the package. Now that the
sanctions on Iran are likely to be lifted, construction of the pipeline is expected to
commence as early as September 2015.
Part of the CPEC agenda is, naturally, providing significant funding. For example, a
720,000–kw hydroelectric project in Rawalpindi, estimated at a cost of US$1.65bn, is
already earmarked for support from China's US$40bn Silk Road Fund. In addition,
the Export–Import Bank of China, a state–owned policy bank, has stated that it will
finance the hydropower project through syndicated loans. Furthermore, the state–
owned Industrial and Commercial Bank of China has agreed to offer US$4.3bn in
loans for four additional power projects.
If all these investments materialise, they will provide a much–needed boost to the
Pakistani economy, the growth potential of which is constrained by inadequate
infrastructure and an acute shortage of power–generation capacity. Improved road
and rail networks will help the flow of goods and commodities through the country,
while Chinese investments in the power sector will lay the foundations for a more
reliable energy–supply system.
However, many of these projects have been discussed before and have failed to
materialise, owing mainly to the unstable security situation in Pakistan. Islamist
insurgencies, especially in Balochistan, continue to hold back development and will
pose an ongoing security risk. Within Pakistan, CPEC has led to significant friction,
as there are concerns that a change in the planned routes of roads from poor
Balochistan to rich Punjab would heighten inequality. With regard to energy
investment, the Pakistani government must still clarify its pricing structures and
manage its power supplies adequately in order to reap the potential benefits.
This time, it's for real
Despite all of these caveats, there are signs that China's commitment to pursuing
investments under the umbrella of CPEC is firm. Indeed, the same security concerns
that have derailed investments in the past are now key drivers in their
implementation. The Chinese government is thought to believe that it has no choice
but to actively support the Pakistani economy in a bid to stabilise the country. In
turn, it hopes to receive pledges from its Pakistani counterpart to curb any
adventurist instincts that could destabilise Afghanistan or add fuel to the proxy
wars in the Persian Gulf. China will also hope to maintain the usual bilateral co–
operation on curbing the activities of Islamic radicals from China's Xinjiang–based
Uighur minority in Pakistan's neighbourhood.
The fear of instability in Afghanistan, and the potential spillover to the restive
region of Xinjiang following the NATO drawdown from Afghanistan, is prompting
China to take a more proactive role in regional stability. Moreover, the infrastructure
investments that China has vowed to undertake in Pakistan are a key part of Mr Xi's
grandiose foreign policy paradigm, the "One Belt, One Road" initiative, which aims
to connect China by land and sea through Central Asia and South Asia to its export
markets in Europe and its resource suppliers in the Middle East and Africa.
As CPEC dovetails with a number of China's security and commercial interests, there
is a significant likelihood that at least some of the infrastructure work will
materialise. However, for it to become the economic game changer that Pakistan
needs, the Pakistani government will need to deliver a stable security and
predictable policy environment, or hope that China's tolerance for political risk in
Pakistan will increase.
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China
Economy
Forecast updates
August 3, 2015: Economic growth
PMI points to weaker manufacturing activity in July
Event
The official manufacturing purchasing managers' index (PMI) fell to 50.0 in July,
from 50.2 in June, according to data released by the China Federation of Logistics
and Purchasing (CFLP) on August 1st. A reading above 50 indicates an expansion
in manufacturing activity.
Analysis
The weakening in manufacturing activity suggests that the real economy may not
be entirely insulated from recent stockmarket volatility. This was the first reading of
the PMI since a long bull run in equities began to falter in mid-June. There has
traditionally been little correlation between stockmarket performance and economic
growth, as only a minority of households holds stocks and equity financing plays a
limited role in corporate financing. However, the volatility may be causing anxiety
among consumers and investors. The manufacturing PMI published by
Markit/Caixin dropped steeply in July, to 47.8, from 49.4 in June, according to data
released on August 3rd. The Markit/Caixin survey focuses on small- and mediumsized enterprises that receive less coverage in the PMI released by the CFLP.
The fall in the official PMI in July was led by a deterioration in output and demand
indicators. The production sub-index fell to 52.4, compared with 52.9 in June. New
orders slipped into contractionary territory, recording a reading of 49.9 in July,
against 50.1 in June, while exports also remained below 50 at 47.9 (compared with
48.2 in June). The employment sub-index fell to 48.0 in July, from 48.1 in June,
indicating ongoing job-shedding in the sector. The only two components to
improve against the previous month were readings for the purchasing price index
and suppliers' delivery time.
The government will maintain a bias towards supportive policies in the second half
of the year to meet its annual real GDP growth target of "about 7%". The economy
expanded at exactly that rate in January–June, aided by the booming stockmarket
and a high trade surplus. These factors will be less present in the second half of the
year; the government will instead look to provide an offsetting lift through
increased infrastructure construction—the People's Bank of China (the central bank)
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China
boosted lending allocations to major policy banks last month. Growth momentum
should improve, in any case, in the coming months as real-estate investment
responds to the recent recovery in house prices.
Impact on the forecast
No changes are necessary. Our provisional plans to raise our forecast for economic
growth in 2015 to 6.9%, from 6.8% previously, remain unchanged.
August 5, 2015: Economic growth
Policy banks to issue special construction bonds
Event
State-owned policy banks will issue up to Rmb1trn (US$163bn) in bonds to support
infrastructure spending, according to a report carried by state media on August 5th.
Analysis
The government is broadening its use of fiscal and monetary policy tools as it looks
for sources of growth to support the economy in the second half of the year.
Although real GDP expansion in January-June was in line with the government's
target of "about 7%", a correction in domestic stockmarkets and a likely fall in the
goods trade surplus mean that growth prospects for the remainder of the year are
cloudy. Data for manufacturing purchasing managers' indices deteriorated in July.
The report, carried in the state-owned Economic Information Daily, suggested that
two major policy banks, China Development Bank and the Agricultural Development
Bank, will soon issue a combined Rmb300bn (US$49bn) in bonds. Both institutions
have recently been recapitalised. The paper will be placed at heavily discounted
rates with the Postal Saving Bank of China, which will receive financing support
from the People's Bank of China (the central bank) via its pledged supplementary
lending mechanism. It is likely that at least Rmb1trn of these special construction
bonds will be issued within a three-year period.
The funds will be used to invest in urban infrastructure projects. Construction of
city railways, water-conservation facilities and sewage and gas pipelines are set to
be a focus. According to the report, a co-ordinating body will be set up within the
National Development and Reform Commission (the economic planning agency) to
feed projects upwards to the policy banks.
The bond issuance is an effort to kick-start stalled investment. A clampdown on
local-government financing vehicles has a left a financing vacuum for infrastructure
work. Rather than remove the constraints imposed on local-government debt
issuance, the central government has decided to step into the void. The spending
plans suggest that the government is taking pre-emptive measures to ensure that its
annual economic growth target is not placed at risk. Combined with a modest
rebound in real-estate investment, the package should ensure that real GDP growth
remains close to the targeted level. Nevertheless, there will be questions about
whether this represents an efficient form of investment, generating enough returns
to justify its cost.
Impact on the forecast
Our plan to raise our real GDP forecast to 6.9% in 2015, from 6.8% currently, is
consistent with these developments.
August 10, 2015: External sector
Exports and imports both weaken in July
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China
Event
Merchandise exports slumped on a US–dollar basis by 8.3% year on year in July,
while imports declined by 8.1%, according to data released by the General
Administration of Customs on August 8th. The trade surplus for the month was
US$43bn.
Analysis
The trade data add to indications that the economy is losing steam after a relatively
strong performance in the first half of 2015. The year–on–year fall in the value of
exports followed a 2.1% rise in June, while the decline in imports was sharper than
the 6.4% contraction recorded in the previous month. The data brings the year–to–
date fall in exports and imports to 0.7% and 14.5%, respectively. This is far short of
the government target of 6% growth in external trade for 2015.
Exports to most destinations faltered in July. Those to the US fell by 1.4% year on
year, a worrying sign after a relatively robust performance in the first six months of
2015. Exports to the EU contracted by 12.3% in July, compared with a 3.4% decline
in the previous month. Exports to Hong Kong, Japan and South Korea all declined,
while a rise of 1.4% in shipments to the Association of South–East Asian Nations
(ASEAN) was meagre compared with an 8.4% increase in June.
Imports continue to be weighed down by weak global commodity prices, as well as
the poor performance of exports (as many imports serve as components in exported
goods). In volume terms, imports of major commodities, such as crude oil, iron ore,
unwrought copper and soybeans, posted increases in July. However, each fell in
value terms. A contraction of 5.2% year on year in the value of mechanical and
electronic products pointed to the weakness in the processing trade. Motor vehicle
imports slumped by 26.5% in value, reflecting a slowdown in the domestic car
market.
The weak export performance will exert a drag on economic growth. The trade
surplus for July fell short of that in June (US$45.7bn) and in July 2014 (US$47.3bn).
This suggests that net exports may not offer as much support to GDP expansion in
July–September as they did in the first half of 2015. Economic growth prospects will
therefore hinge on efforts to stimulate domestic demand.
Impact on the forecast
Our forecast that exports will rise in US-dollar terms by 1.9% in 2015 looks too high
in the light of these data, but our expectation that imports will fall by 12.4% remains
appropriate.
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China
August 10, 2015: Inflation
Producer price slump as consumer price rises accelerate
Event
The consumer price index (CPI) rose by 1.6% year on year in July, according to the
National Bureau of Statistics (NBS), up from 1.4% in June.
Analysis
Price pressures are mounting in the economy, posing additional challenges for
policymakers as they struggle to support economic growth. Inflation quickened for
the second month in a row year on year in July, while prices rose by 0.3% month on
month.
The NBS attributed 0.48 of a percentage point of the 1.6% annual increase to a sharp
rise in pork prices, which rose by 16.7% year on year, compared with 7% in June.
Recent reports in the state media have revealed that pork has a weighting of 2.9% in
the CPI. Inflation would have been higher in July were it not for a steep drop in the
price of eggs, of 14.7%, which knocked 0.13 of a percentage point off the headline
inflation figure. Other than the cost of food, which rose overall by 2.7% year on year
in July, significant price pressures were observed for tobacco and liquor, clothing
and healthcare, which were up by 3.6%, 2.9% and 1.9%, respectively. Transport and
communication prices continued to fall in year–on–year terms, driven by lower oil
costs.
China's producer price index posted its largest year–on–year fall in six years in July,
declining by 5.4%, a reflection of lower global oil prices and the industrial sector's
failure to make significant headway in reducing overcapacity. Heavy industrial
sectors such as coal, steel and oil continued to drive the overall downward trend in
producer prices.
Worryingly, the month–on–month decline in producer prices in July, at 0.7%, was
the largest since February, suggesting that there is little sign of any reversal in the
steep producer price slide. Some view the fact that consumer price inflation remains
below the government's 3% target as providing room for monetary stimulus.
However, the tendency of the banking system to channel additional credit towards
extra productive capacity suggests that the government's main priority in
addressing the producer price slump should be assisting efforts to rationalise
supply.
Impact on the forecast
Consumer price trends are in line with our forecasts, but we will be reducing our
projection for producer price inflation in 2015–16, as the data continue to surprise
on the downside.
August 11, 2015: Exchange rates
Central bank allows the renminbi to weaken
Event
On August 11th the People's Bank of China (PBC, the central bank) moved the
renminbi's central parity rate against the US dollar lower by almost 1.9% compared
with the previous day's rate.
Analysis
The move, which The Economist Intelligence Unit had not anticipated, has been
seen by many as part of the government's policy response to the disappointing
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China
economic data of recent months, including the poor export figures published on
August 10th. The weaker currency will support China's export competitiveness.
Nevertheless, China's exports have held up better than many rivals so far in 2015
and the boost to exporters will be relatively modest. The scale of the decline
unveiled on August 11th is small, especially compared with the depreciation of
many other emerging-market currencies against the renminbi over the past two years
or so.
The PBC's actions do not represent a departure from its ambition to liberalise
China's exchange rate, or a return to direct government setting of the exchange rate.
The renminbi has been under downward pressure in recent weeks, with PBC
adjustments to the central parity rate not fully reflecting movements of the currency
within the 2% daily band about the parity rate within which the renminbi is permitted
to trade. The PBC's move thus arguably represents an acknowledgement of market
forces, although it will doubtless also please many of those within the government
who are pressing for more concerted policy action to support the economy.
Nevertheless, the latest move is likely to have some negative repercussions. A
weaker currency will increase inflationary pressures within China, which had in any
case been rising for consumers. The struggling heavy-industry sector will not
welcome higher imported commodity prices, and some firms with foreign debts will
face a tougher repayment burden. The depreciation could also complicate China's
efforts to get the IMF to allow the renminbi to join the basket of currencies that
make up its special drawing rights (SDR) currency unit. Although there is no reason
why the PBC's announcement should contravene the key requirement that SDR
currencies be "freely usable", suggestions that China is engaging in a currency war
may reduce political goodwill towards it. Perhaps the greatest risk, however, is that
the depreciation may encourage perceptions that further declines in the renminbi's
value are imminent, increasing the danger of destabilising capital outflows.
Impact on the forecast
We will adjust our exchange­rate forecasts for 2015–16 lower in the light of the
PBC's announcement.
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China
August 12, 2015: Monetary policy outlook
Bank lending jumped in July
Event
Renminbi-denominated lending by banks reached Rmb1.48trn (US$241bn) in July,
according to figures released on August 11th by the People's Bank of China (PBC,
the central bank). Growth in the broad money supply (M2) accelerated to 13.3% year
on year at end July, from 11.8% at end June.
Analysis
The monthly net increase in renminbi loans was the fastest since June 2009,
suggesting that the central bank is pushing banks to increase normal lending in
order to prop up economic activity. A statement on the PBC website cited a recent
series of policy interest-rate and reserve requirement cuts as the leading factors
behind the rise in loans outstanding. Furthermore, an increase in public
infrastructure spending and policy lending initiatives aimed at supporting economic
growth has served to boost credit demand.
Demand for loans has been further stoked by a recovery in house sales and
increased demand for borrowing from companies. In January July, financial
institutions issued Rmb3.64trn in new working capital loans, nearly double the total
for the same period of last year. Another policy initiative, the local government
bonds-for-debt swap programme, has increased regional authorities' direct
fundraising activity, with Rmb1.41trn in local government bonds issued by the end
of July.
Despite rapid bank loan growth, Total Social Financing (TSF), a broader
measurement of credit issuance, weakened sharply in July to Rmb718.8bn
(US$117.3bn), from Rmb1.85trn in the previous month. This reflects the PBC's efforts
to curb other forms of financing in favour of bank lending, which is easier to
regulate. It could also indicate lacklustre credit demand conditions in the real
economy. If financing is being brought back into bank channels, that would favour
the state sector over the more productive private sector, as the former still enjoys
more favourable access to bank credit.
Impact on the forecast
The financing data portray a mixed and unclear picture, but we are likely to revise up
our forecast for M2 expansion at end 2015 from 10.6% currently in response to the
data.
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China
August 13, 2015: Economic growth
Weak July data offer cautionary note on growth prospects
Event
Data published by the National Bureau of Statistics on August 12th showed that
retail sales of consumer goods increased by 10.5% year on year in July, down from
10.6% in June. Growth in industrial value added slipped from 6.8% to 6% over the
period. Meanwhile, urban fixed-asset investment growth decelerated to 11.2% year
on year in January–July, from 11.4% in January–June.
Analysis
The weak set of data underscored the challenges facing the economy in the second
half of the year, explaining why the government has moved towards more decisive
policy easing. In particular, the slowdown in fixed-asset investment growth will be a
concern, given expectations that it would strengthen on the back of a warming
property market and promises by the government of additional outlays on public
infrastructure. Investment in real estate continued to slow, with growth in such
investment standing at 4.3% year on year in January–July, compared with 4.6% in
the first half of 2015. Moreover, land sales (an advance indicator for property
development) also continued to contract at roughly the same pace, falling by 32% in
January–July.
More positively, retail sales growth remained solid in July, suggesting that recent
stockmarket volatility has not unduly damaged consumer confidence. The services
sector continued to be the economy's brightest spot and it is notable that China's
official purchasing managers' index (PMI) for service companies remained firmly in
expansionary territory in July, at 53.8, compared with the score of 50 (borderline
between expansion and contraction) for the manufacturing PMI in the same month.
The data offer a few clues as to why the government has allowed the renminbi to
depreciate in recent days. The weakness in domestic demand means that the
performance of exports will help to determine whether the government is able to
reach its economic growth target of "about 7%" this year. Officials will hope that the
renminbi's depreciation can help to lift shipments in the coming months.
Impact on the forecast
The latest data suggest downside risks to our forecast that economic growth will
average 6.9% in 2015 and 6.5% in 2016, but for now we expect to hold to our current
projections.
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China
Analysis
August 10, 2015
Provincial governments issue bonds to defy debt woes
With the exception of Tibet, all of China's provinces have issued general
government bonds this year, facilitated by the local government debt swap
programme introduced by the Ministry of Finance (MoF) in March. The combined
Rmb779.5bn (US$127.2bn) raised so far will help provincial governments to
manage a near-term funding crunch triggered by maturing debt repayments. In the
longer term, however, demand for local government bonds will only remain firm if
the authorities allow risk to be priced more effectively.
The flood of bond issuance this year reflects a push by the central authorities to
contain the risks associated with a steep rise in local government borrowing. In
March the MoF announced details of a debt restructuring plan, permitting localities
to swap as much as Rmb1trn (US$163.1bn) in debt for bonds with lower financing
costs and longer repayment periods. In June the quota was expanded by a further
Rmb1trn. Revisions to the budget law that came into force at the beginning of this
year abolished a ban on the direct issuance of bonds by provincial and municipal
authorities.
Kick-off
As a result, the provincial government bond market has kicked off in earnest. Thirty
provincial governments have looked to swap their debts into securities, mostly in
order to finance short- and medium-term public debt repayments. Bonds issued so
far this year by provincial governments have been classified into four maturities. By
maturity, 5-year bonds have accounted for 29.8% of the aggregate issuance, or
Rmb232.1bn, followed by seven-year bonds (Rmb229.5bn), ten-year bonds
(Rmb199.6bn) and three-year bonds (Rmb118.3bn). The interest rates on these
bonds have ranged from 2.8% to 3.7%.
Provincial debt swap, 2015
(Rmb bn)
Provinces
Aggregate
3-year
5-year
7-year
10-year
Hebei
47.0
9.4
14.1
14.1
9.4
Sichuan
45.0
13.5
13.5
13.5
4.5
Henan
42.4
4.3
12.7
12.7
12.7
Hunan
42.2
4.4
12.6
12.6
12.6
Jiangxi
41.7
4.2
12.5
12.5
12.5
Zhejiang
40.0
4.0
12.0
12.0
12.0
Shanghai
38.7
3.9
11.6
11.6
11.6
Liaoning
36.4
7.3
10.9
10.9
7.3
Shandong
36.0
7.2
10.8
10.8
7.2
Guizhou
33.6
6.8
10.0
10.0
6.8
Anhui
31.2
6.3
9.3
9.3
6.3
Guangdong
31.0
3.1
9.3
9.3
9.3
Inner Mongolia
29.4
4.4
8.8
8.8
7.4
Yunnan
28.6
4.6
8.0
8.0
8.0
Beijing
28.0
2.8
8.4
8.4
8.4
Chongqing
26.5
4.0
7.9
8.0
6.6
Jilin
22.9
2.3
6.9
6.9
6.9
Gansu
20.0
2.0
6.0
6.0
6.0
Guangxi
20.0
4.0
6.0
6.0
4.0
Hubei
20.0
2.0
6.0
6.0
6.0
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China
Heilongjiang
18.2
4.6
5.5
2.8
5.4
Shaanxi
17.7
1.8
5.3
5.3
5.3
Shanxi
16.7
2.3
4.8
4.8
4.8
Qinghai
15.3
2.8
4.0
4.0
4.5
Tianjin
13.2
1.5
3.9
3.9
3.9
Fujian
11.6
1.2
3.5
3.5
3.5
Hainan
8.1
0.8
2.4
2.4
2.4
Ningxia
7.0
0.7
2.1
2.1
2.1
Xinjiang
5.9
1.2
1.8
1.8
1.2
Jiangsu
5.2
1.0
1.6
1.6
1.0
779.5
118.3
232.1
229.5
199.6
Total
Sources: Local departments of finance.
The biggest issuer among provinces has been Hebei, which has released Rmb47bn
of paper. The province accumulated a large pile of debt in the wake of the 2009
stimulus package, and the government's ability to repay it has been compromised by
a faltering economic performance and dwindling business tax inflows—largely a
consequence of a clampdown on the province's heavily polluting steel industry.
The debt issuance will provide some welcome relief for the Hebei government as it
looks to meet its repayment obligations.
Hebei has been followed by Sichuan and Henan, which have issued bonds worth
Rmb45bn and Rmb42.4bn respectively. A correction in the property sector has hit
local government land sales receipts in both provinces. As well as supporting debt
repayment, the bonds may also be used to support economic growth through
projects relating to public consumption and infrastructure investment. Richer
provinces, such as Zhejiang, Shanghai and Guangdong, have also swapped
considerable amount of debt into bonds. Smaller provinces, such as Ningxia and
Xinjiang, have participated to a lesser extent.
Intervention leads to distortions
Although the local government debt restructuring programme is proceeding, it has
not been a smooth process. Several provinces were initially forced to delay issuance
owing to weak demand. Jiangsu failed to sell its initially planned Rmb64.8bn offering
in late April, with the yields on offer deemed too low by the underwriting groups,
almost all of which are domestic banks. The province was eventually able to issue a
smaller bracket of Rmb52.2bn in May, but only after the government had leaned
heavily on the banks to absorb the paper. This reportedly involved allowing banks
to use local government bonds in their possession as collateral to obtain lowinterest-rate loans from the People's Bank of China (PBC, the central bank) for
targeted relending.
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China
The reluctance of banks to purchase local government bonds was not surprising.
The absorption of these assets would mean less room to allocate funds to higher
interest-bearing and more liquid assets, such as bank loans and inter-bank
financing. Banks have also been under pressure to increase the pace of loan
issuance at a time of slowing economic growth. With the possible exception of the
commercial opportunities on offer in a particular province, the rationale for
purchasing local government paper was difficult to discern, at least until the PBC's
intervention.
The government's determination to implement the programme has resulted in some
distortions. All provinces have been able to issue bonds at interest rates of 2.83.7%, similar to those of central government paper, commonly regarded a risk-free
asset in the marketplace. Moreover, less-developed provinces with relatively weak
fiscal positions, such as Guangxi, Hubei and Xinjiang, have actually managed to
issue bonds at lower yields than those of the central government. However, bonds
issued by some developed coastal provinces, such as Guangdong, Zhejiang and
Beijing, have higher interest rates.
The bonds issued by north-eastern Heilongjiang, for example, enjoy a negative
spread against central government bonds, suggesting they represent a "haven" for
investors. However, the province's economy has been struggling since 2012 as a
result of structural weaknesses, such as industrial overcapacity and population
ageing. Moreover, Heilongjiang's public revenue was on the cusp of negative
growth in 2014.
This underscores that although the debt swap is proceeding, risk is not being priced
effectively. The strength of provincial economies varies widely, but the interest
rates secured in recent auctions bear little resemblance to underlying economic
conditions. Instead, bond yields have been set by design, rather than by the market.
State-owned banks have had to swallow these risk-varied and non-liquid assets
under the commands of the central government.
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China
A little therapy
According to the National Audit Office, the total outstanding debt and obligations
of local governments stood at Rmb17.9trn (US$2.9trn) at mid-2013, with Rmb5.2trn
being at the provincial level. According to Economist Intelligence Unit estimates,
debt worth Rmb805.4bn will mature by end-2015, with the rest due in subsequent
years. We project that the debt swap programme will reduce provincial government
interest payments by Rmb42.8bn in 2015. Given the vast size of provincial debts, the
programme will therefore provide only a modest salve to provincial governments
trying to pay down their debts.
While it may not solve the problem, the expansion of local government bond
issuance is meaningful for financial-sector reform and will probably bring positive
effects for the fixed-income market, from valuation to trading. Compared with
domestic stockmarkets, which have been subject to recent volatility, the
development of the fixed-income market has lagged behind. The bond programme
will help to kick-start it.
On the one hand, local government bonds will give more options to investors by
boosting market liquidity. Foreign institutional investors (central banks, sovereign
wealth funds and financial institutions) have been allowed to invest in Chinese
domestic bonds through the inter-bank market since July 14th. On the other hand,
the further opening of domestic bond markets, especially local government
securities, will support direct financing activities and gradually promote higher
standards.
Hope and concern
The provincial government bond swap highlights that the central government is
trying to tackle local debt issues by optimising the role of capital markets. It will
probably serve as a prelude to municipal and even county-level bond issuance. The
onshore bond markets will gain momentum on the back of these developments and,
in the short-term, may offer respite to investors given falls in the value of the
stockmarket.
Nevertheless, the modest scale of the interest payment savings for provincial
governments means that underlying fiscal problems remain. Solving this problem
will require a complicated realignment of the heavily centralised fiscal system.
Moreover, for the fixed-income market to operate effectively, the government will
also have to reduce its level of intervention and allow investors to price risk
effectively. Hopes that foreign investors will increase their exposure to this asset
class will depend on it. As has been shown with recent policy missteps in relation to
the stockmarket, however, the government cannot necessarily be relied upon to do
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this.
August 12, 2015
Faltering car market adds to economic challenges
A fall in passenger car sales in June has raised concerns about the health of the
market and what it signals about the state of the economy. There are a variety of
factors that are acting to bring down car sales, including weaker pent-up demand,
ownership restrictions and stockmarket volatility. Although the recent sales
decline is unlikely to be sustained, the years of double-digit growth are clearly
over.
Slower economic growth in China has been blamed for the decline in sales of
passenger vehicles. Although China's economic expansion has moderated,
disposable incomes have continued to rise and the stock of passenger vehicles has
ample room to increase. In 2014 China had just under 80 passenger vehicles per
1,000 people, according to estimates by The Economist intelligence Unit, compared
with rates of nearly 370 vehicles per 1,000 people in the US and over 540 vehicles
per 1,000 people in Germany.
The slow lane
Performance was particularly weak in June. The China Association of Automobile
Manufacturers (CAAM) noted that only 1.5m passenger vehicles were sold that
month, down by 3.4% year on year. The decline came despite carmakers' efforts to
boost demand by cutting prices. The picture was better for the first half of 2015 as a
whole; cumulative sales of 10.1m represented a rise of 4.8% over the year-earlier
period. Nonetheless, even that compares unfavourably with sales growth of 11.2%
in the first half of 2014. CAAM data are based on reported sales to dealers, rather
than actual retail sales.
The slowdown in passenger car sales in the first half of 2015 was concentrated in
sedan cars (by far the largest market segment) and, particularly, crossover utility
vehicles. Year-on-year sales for those categories fell by 5.9% and 19%, respectively.
By contrast, sales of sports utility vehicles (SUVs) surged by nearly 46% in the first
half of 2015, while those of multi-purpose vehicles (MPVs) expanded by over 15%.
In part, lower car sales probably reflect carmakers' failure to keep pace with
changing consumer preferences.
There was an enormous variation between car brands. Germany's Volkswagen,
China's top-selling car make in 2014, saw its sales drop by 6.5% year on year in the
first half of 2015, with only its compact Polo marque and Tiguan SUV recording
gains. Its sales growth had amounted to over 22% in the year-earlier period. In sharp
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contrast, Japan's Mazda, a much smaller player in the Chinese market, is struggling
to keep pace with demand. Its vehicle sales surged by nearly 23% year on year in
January-June, up from an already-healthy 14.6% in the first half of 2014.
Carmakers, including Volkswagen and another German firm, BMW, are offering
financial assistance to dealers hard hit by the weak market. In early 2015 BMW
agreed to pay Rmb5.1bn (US$830m) to its dealers to help to cover losses as car
orders shrank. In July Volkswagen, which has only a limited presence in the
expanding SUV and MPV segment, reportedly offered financial assistance totalling
Rmb1bn to support distributors selling cars made by the company's joint venture
with a China-based car manufacturer, FAW Group.
Restrictions and uncertainty
Slowing economic growth, lower pent-up demand and restrictions on car use in
major cities have all probably cut into passenger-car sales. Several major cities have
imposed restrictions on car sales through a quota and lottery system in an effort to
combat pollution and traffic problems. The latest to do so, in December 2014, was
Shenzhen in the southern Guangdong province. The purchase of a licence plate is
equivalent to the cost of buying a small sedan car in some cities, such as Shanghai.
The construction of new urban public-transport systems in major cities and the
expansion of existing ones may also be discouraging car purchases, particularly for
low- and middle-income households. Worsening traffic congestion means that
driving is no longer a convenient form of transport in some urban areas.
Volatility in asset markets is also likely to have had a negative impact on car sales,
particularly among the aspiring middle class. The housing market is fragile and share
prices on domestic stock exchanges have ridden a boom-bust wave. The benchmark
Shanghai Stock Exchange Composite Index, which had more than doubled over the
12 months to mid-June, has since plunged by almost 30%. It appears that funds
were diverted from buying consumer durables such as cars to the stock exchange in
the second half of 2014 and early 2015. The evaporation of some of those
investments in the recent stockmarket plunge suggests that car sales will remain
weak in the second half of 2015. The China Passenger Car Association reported that
falling share prices had left some customers who put down deposits on cars unable
or unwilling to pay the balance and take delivery.
Some of the slide in passenger-car sales may be the result of one-off factors. Sales
in the first half of 2014 were boosted by fears that more municipalities, including
Chengdu, Suzhou, Nanjing and Xian, intended to introduce ownership restrictions.
It was reported that passenger-car sales in Nanjing surged by 60% in the first half of
2014 in response to rumours that restrictions on car ownership were about to be
imposed. Not surprisingly, sales in that market are now in decline in annual terms.
Commercial vehicle hints at recovery
The commercial vehicle market, which is closely associated with developments in
property construction, was already struggling in 2014. According to CAAM, total
commercial vehicle sales fell in volume by 6.5% that year, with truck sales down by
8.9%. This was partly offset by an 8.4% increase for buses. Sales continued to drop
in the first half of 2015, declining by 14.4% year on year to just under 1.8m by endJune. Over that period, sales of trucks slumped by 16.8%, while those of buses
edged up by 0.9%.
There are some signs that the commercial vehicle market might be recovering after
its prolonged slump. In June sales rose by 3.5% year on year, the first monthly
increase since March 2014. This may reflect signs of a warming-up in the housing
market. In recent months house prices have begun to inch back up as a result of
strong purchasing activity. Those gains reflect lower interest rates and easier
access to capital; the People's Bank of China (the central bank) cut interest rates for
the fourth time in seven months in June. Although the growth of investment in
property construction remains weak, it is likely to accelerate in the second half of
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China
2015 and into next year.
Capacity overhang
Concern about overcapacity at China's car plants is also mounting in the context of
slower sales growth and continued large-scale investment in production. Inventory
levels have risen sharply. According to CAAM, passenger-car inventory stood at
1.2m units at end-June, representing a rise of over 50% year on year and to the 1.5
months' worth of sales widely considered as an "alert level". Production is adjusting
to weaker demand; the number of passenger cars produced in June was lower than
in the same month of last year. Nevertheless, in the first six months of 2015,
passenger-car production was still up by 6.3% to 10.3m units.
Although slowing growth in the world's largest automotive market is a significant
concern for the major foreign car makers operating in China, they are still investing
heavily in their Chinese joint-venture operations. For example, Volkswagen's plans
involve expanding capacity in China to 5m vehicles by 2019, up from 3.5m in 2014.
Overcapacity is an even greater problem among domestic producers, where pressure
for consolidation is mounting. According to two consulting firms, JSC and Deloitte,
underutilised capacity at Chinese car plants will reach 11.4m units by 2017. Many
domestic car firms have built out capacity in the hope of reclaiming market share
from foreign rivals, but they still accounted for 38% of passenger car sales in 2014—
a ratio that has fallen in recent years.
Wider economic linkages
Weak car sales will weigh on economic growth prospects. Motor vehicles
represented 14.5% of the total value of retail sales of consumer goods in 2014,
according to the National Bureau of Statistics. Their sales performance is also linked
to that of petroleum purchases, which accounted for a further 6.8% of retail sales in
the same year. Faltering sales will dent private consumption, which is becoming an
increasingly important driver of GDP growth.
On the investment side, the economy is better insulated from weaknesses in the car
market. Fixed-asset investment (FAI) in automotive manufacturing represented only
2% of total FAI in 2014. Concerns about overcapacity may eventually result in the
scaling-back of investment plans, but the wider economic implications of this are
limited. The current weakness in FAI growth instead stems mainly from the property
sector.
The EIU's forecasts assume that the decline in sales in June will not be sustained.
The fundamental drivers of demand for cars remain present, including rising
incomes, changing lifestyles and relatively low ownership rates. We expect growth
in passenger car sales to reach 3.2% in 2015 as a whole, before picking up to 5.4% a
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China
year on average in 2016–19. Nevertheless, this is a modest pace of expansion
compared with the double-digit rates of recent years, a reflection of a more mature
and challenging car market.
Country Report August 2015
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© Economist Intelligence Unit Limited 2015