CHINA’S ECONOMY

AT A GLANCE CONTENTS NOVEMBER 2020 Key points 2 Industrial Production 3

Investment 4

International trade - trade 5 balance and imports International trade - 6 exports Retail sales and inflation 7

Credit conditions 8

CONTACT Gerard Burg, Senior Economist - International

NAB Group Economics 1 KEY POINTS

Consumers gradually returning to the market, with China still reliant on industry

• The latest data from China show China’s economic recovery continued into the start of Q4, however consumption still remains below its pre-COVID- 19 growth. Instead, growth continues to be driven by heavy industry, supported by construction demand. Overall, our forecasts are unchanged, with China’s economy to expand by 1.8% in 2020 and 9.5% in 2021.

• China’s industrial production grew at an unchanged rate in October – increasing by 6.9% yoy. This rate of increase is comparatively strong when compared with recent history, highlighting the sector’s key role in China’s post-COVID-19 growth.

• Real fixed asset investment increased strongly in October, up by 11.5% yoy. This was the strongest increase since May 2016. Private sector investment has grown more rapidly in recent months, as growth in real estate investment has continued to accelerate.

• Real retail sales increased by 4.6% yoy in October (up from 2.5% yoy in September), only the second positive reading in 2020. Retail sales growth remains below its pre-COVID-19 levels (particularly in nominal terms).

• China’s trade surplus widened significantly in October, reflecting a month-on-month drop in the value of the country’s imports. The surplus totalled US$58.4 billion (compared with US$37.0 billion in September). China’s trade surplus with the United States has been trending higher in recent months. The incoming Biden Administration in the United States is likely to be less aggressive on trade policy than President Trump, however it may pursue multi-lateral trade deals that could prove negative for China.

• In the first ten months of 2020, new credit issuance totalled RMB 31.0 trillion, an increase of 44.5% yoy. Bank loans account for the largest share of the total, however these loans have grown relatively slowly this year – increasing by 22.8% yoy to RMB 17.6 trillion.

• China’s monetary policy has remained stable since April, when the People’s Bank of China (PBoC) last cut its policy rate. Compared with other major economies, the PBoC has considerable policy room, however officials have stated repeatedly in recent months that current rates are appropriate – in part reflecting the longer term risks given existing high debt levels in the corporate sector and the potential for asset price bubbles.

2 INDUSTRIAL PRODUCTION

INDUSTRIAL PRODUCTION • China’s industrial production grew at an unchanged rate in October – Growth unchanged in October, but strong for recent history increasing by 6.9% yoy. This rate of increase is comparatively strong when compared with recent history, highlighting the sector’s key role in China’s % yoy post-COVID-19 growth. 20

15 • Strong activity in the construction sector has supported growth in heavy industrial products – such as crude steel and cement, where output 10 increased by 12.7% yoy and 9.6% yoy respectively. 5 • Production of motor vehicles continued to expand rapidly – up by 11.1% yoy 0 – while output of electronics rose by 5.0% yoy, down from 8.0% yoy in -5 September. This slowing growth reflected a year-on-year fall in mobile phone production. -10

-15 • In recent months there has been a persistent gap between the readings of 2005 2007 2009 2011 2013 2015 2017 2019 China’s two major manufacturing surveys and the gap widened in October. Source: CEIC, NAB Economics The private sector Caixin Markit PMI was stronger – up to 53.6 points (from MANUFACTURING PMI 53.1 points in September). In contrast, the official NBS PMI eased marginally – down to 51.4 points (from 51.5 points previously). Widening gap between the two surveys Index 60 • There were differing trends in the measure of new export orders. While both have been in positive territory in recent months, the NBS PMI measure strengthened in October, while the Caixin Markit measure eased from a 55 NBS PMI multi-year high, attributed to the impact of COVID-19 in Europe. Given that the survey was largely conducted ahead of announced restrictions across the 50 continent, prospects are likely to weaken further next month.

Caixin Markit PMI 45

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35 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CEIC, NAB Economics 3 INVESTMENT

FIXED ASSET INVESTMENT • Growth in fixed asset investment accelerated again in October, increasing Private sector driving a greater share of the growth by 9.5% yoy (from 7.5% yoy in September). Stability in producer price inflation – which flows through to the cost of investment goods – means % yoy Nominal investment (% yoy, 3mma) 50 50 that our estimate of real investment increased strongly, up by 11.5% yoy. This was the strongest increase since May 2016. 40 40 Fixed asset investment Non-SOEs 30 30 • While state-owned enterprises (SOEs) drove the initial recovery in (nominal) investment, growth has slowed in recent months (on a three month 20 20 moving average basis). In nominal terms, SOE investment rose by 6.9% yoy 10 10 (3mma), compared with double-digit growth in July. State Owned 0 0 Enterprises • In contrast, private sector investment has continued to grow more rapidly Fixed asset -10 -10 – up by 9.0% yoy (3mma), from 7.1% yoy (3mma) in September. Last month investment (real) private sector growth overtook that of SOEs. -20 -20 -30 -30 • When broken down by industry, investment trends remain divergent. On a 2008 2012 2016 2020 2008 2012 2016 2020 three month moving average basis, investment in real estate has Source: CEIC, NAB Economics continued to pick up – increasing by 12.2% yoy (3mma). In contrast, infrastructure investment has continued to ease in recent months, FIXED ASSET INVESTMENT BY SECTOR increasing by 3.8% yoy (3mma), compared with a peak of 7.6% yoy (3mma) Real estate investment continues to lead the way in July). Investment in manufacturing increased for only the second month % yoy (3mma) in 2020 – up by 3.9% yoy (3mma), from 1.6% yoy (3mma) in September. 50 Manufacturing 40 30 Infrastructure 20 10 0 Investment in Real Estate -10 -20 -30 -40 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CEIC, NAB Economics 4 INTERNATIONAL TRADE – TRADE BALANCE AND IMPORTS

CHINA’S TRADE BALANCE • China’s trade surplus widened significantly in October, reflecting a month- Surplus widened on large month-on-month fall in imports on-month drop in the value of the country’s imports. The surplus totalled US$ billion (adjusted for new year effects) US$58.4 billion (compared with US$37.0 billion in September). 300

250 • China’s trade surplus with the United States has been trending higher in recent months. On a rolling twelve month basis, the surplus totalled Exports 200 US$297.7 billion, compared with the post-trade war low of US$273.8 billion in March. The incoming Biden Administration in the United States is likely 150 to be less aggressive on trade policy than President Trump, however it may Imports pursue multi-lateral trade deals that could prove negative for China. 100

50 • China’s imports totalled US$178.7 billion in October – down from a record high of US$202.8 billion previously. A decline was expected, following 0 Trade balance business closures due to the Golden Week holidays. In year-on-year terms, -50 imports rose by 4.7%. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: CEIC, NAB Economics • This year-on-year increase in imports was partly price related – reflecting a CHINA’S TRADE SURPLUS WITH THE UNITED STATES 2.8% yoy increase in commodity prices (as measured by the RBA Index of Rolling surplus trending higher in recent months Commodity Prices) – but also an increase in volumes. Using commodity prices as a proxy for Chinese import prices, we estimate that import US$ billion (12 month rolling sum) volumes rose by 3.8% yoy in October (somewhat more modest than the 350 13.9% increase in September). 300 • The import trends for key commodities diverged substantially in October. 250 Import volumes for refined copper grew strongly again – up 43.4% yoy 200 reflecting strong domestic demand and shortages in copper concentrate markets. Iron ore imports also rose – up by 14.9% yoy. In contrast, oil 150 China trade surplus with US (China Customs data) import volumes fell by 6.5% yoy and coal imports by 43.4% yoy. 100

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Sources: CEIC, NAB Economics 5 INTERNATIONAL TRADE – EXPORTS EXPORTS GREW STRONGLY AGAIN IN OCTOBER • The total value of China’s exports eased marginally month-on-month in New export orders positive ahead of European lockdowns October – to US$237.2 billion (compared with an all time high of US$239.8 % yoy Index billion in September). However, in year-on-year terms, exports grew by 60 80 11.4% – supported by strong demand for medical supplies and electronics. Export values growth (LHS)

40 70 • There was a slight increase in the new export orders measure in the NBS PMI survey – up to 51.0 points (compared with 50.8 points previously). This 20 60 was the strongest reading since May 2018.

0 50 • Export trends differed significantly in October. There was a strong increase -20 40 in exports to the United States – up by 22.5% yoy – compared with a more modest increase in East Asia, where exports increased by 5.8% yoy. In -40 30 contrast, exports to the European Union and the United Kingdom fell by New export orders index (RHS) 7.0% yoy. This was largely ahead of COVID-19 restrictions, which (with the -60 20 exception of the Netherlands) were implemented in the latter part of the 2008 2010 2012 2014 2016 2018 2020 month. Source: CEIC, NAB Economics EXPORTS TO THE US AND EUROPE • Within East Asia, exports to Hong Kong rose a little more modestly than Diverging trends in growth as European prospects deteriorate the average, up by 4.3% yoy. There has been a long history of distortion in trade data between mainland China and Hong Kong – largely reflecting % yoy capital flows disguised as trade activity. 60 • In contrast, exports to other East Asian markets rose by 6.6% yoy. This 40 increase was largely driven by stronger exports to Vietnam and Malaysia, Exports to US while exports to Indonesia fell. 20

0

-20 Exports to EU-27 and UK

-40 2008 2010 2012 2014 2016 2018 2020 Sources: CEIC, NAB Economics 6 RETAIL SALES AND INFLATION

RETAIL SALES GRADUALLY RECOVERING • China’s retail sector continued its gradual recovery in October, with Sales growth still below pre-COVID-19 trends nominal sales increasing by 4.3% yoy (up from 3.3% yoy previously). Compared with the rapid turn around in the industrial sector, retail sales % yoy remain below the pre-COVID-19 trend. 25 20 Nominal Retail Sales • Retail prices contracted year-on-year in October, meaning that real retail 15 sales increased by 4.6% yoy (up from 2.5% yoy in September), only the 10 second positive reading in 2020. 5 0 • Consumer price growth slowed significantly in October, with the headline -5 Consumer Price Index increasing by 0.5% yoy (compared with 1.7% yoy in -10 September). Real Retail Sales -15 -20 • A substantial slowdown in food price inflation was the key driver of the -25 weaker growth in the CPI. The food price index rose by 2.2% yoy 2008 2011 2014 2017 2020 (compared with 7.9% yoy in September) – the weakest increase since Source: CEIC, NAB Economics February 2019. Prices for pork – which drove the surge in food prices since CONSUMER AND PRODUCER PRICES early 2019 – fell by 2.8% yoy. Reports suggest that supply of pork is Inflation pressures in China remain muted, as pork prices fall starting to recover, following the impact of the African Swine Fever outbreak. % yoy Consumer Prices Producer Prices % yoy 25 100 RBA Index of Commodity • In contrast, non-food prices remained stable, unchanged in year-on-year 20 Prices (RMB terms) (RHS) 80 terms for the third month out of four (with the other month being a 0.1% Food price index (LHS) yoy increase in August). Falling vehicle fuel prices continue to support 15 60 Producer price subdued non-food prices – down by 17.2% yoy in October. index (LHS) 10 40 • Producer prices (in year-on-year terms) fell for the ninth month in a row in 5 20 October, down by 2.1% (the same rate as in September). In part this 0 0 reflects falling commodity prices (in RMB terms), down by 2.6% yoy as a result of currency appreciation. However, falling factory gate prices for -5 -20 consumer products (down 0.5% yoy in October) points to ongoing softness Non-food price index (LHS) in China’s domestic consumption. -10 -40 2008 2011 2014 2017 20202008 2011 2014 2017 2020 Source: CEIC, RBA, NAB Economics 7 CREDIT CONDITIONS NEW CREDIT ISSUANCE Surging in lending driven by growth in bonds and bank loans • China’s new credit issuance slowed significantly month-on-month in RMB trillion October, in line with a typical seasonal pattern. New issuance totalled 35 RMB 1.4 trillion (compared with RMB 3.5 trillion in September). January to October 2020 30 25 • In the first ten months of 2020, new credit issuance totalled RMB 31.0 20 trillion, an increase of 44.5% yoy. Bank loans account for the largest share 15 of the total, however these loans have grown relatively slowly this year – January to October 2019 10 increasing by 22.8% yoy to RMB 17.6 trillion. 5 0 • In contrast, non-bank lending has surged over this period – increasing by -5 88% yoy to RMB 13.4 trillion. In earlier periods of stimulus, non-bank Total social Bank loans Government Net Banker's Trust & Other lending was driven by shadow banking – including segments such as trust finance bonds corporate acceptance Entrusted and entrusted loans and banker’s acceptance bills – however there has bonds bill loans been minimal contribution this year, due in a large part to tighter 44.5% 22.8% 73.0% 64.4% -173.1% -5.1% 22.0% regulation. Instead, growth has been driven by government bond issuance Percentage change (yoy) – up 73% yoy – and net corporate bond issuance (up by 64.4% yoy). Sources: CEIC, NAB Economics

MONETARY POLICY • China’s monetary policy has remained stable since April, when the People’s Stable policy rates look set to continue Bank of China (PBoC) last cut its policy rate. Compared with other major % economies, the PBoC has considerable policy room, however officials have 6.5 stated repeatedly in recent months that current rates are appropriate – in part reflecting the longer term risks given existing high debt levels in the 6.0 corporate sector and the potential for asset price bubbles.

5.5 Benchmark one-year lending rate 5.0 (Discontinued)

4.5

4.0 Loan Prime Rate (current policy rate) 3.5 2014 2015 2016 2017 2018 2019 2020 Source: CEIC, NAB Economics 8 Group Economics

Alan Oster Australian Economics and Behavioural & Industry Economics International Economics Group Chief Economist Commodities Robert De Iure Tony Kelly +61 3 8634 2927 Gareth Spence Senior Economist – Behavioural & Industry Senior Economist Senior Economist – Australia Economics +(61 4) 77 746 237 Jacqui Brand +(61 4) 36 606 175 +(61 3) 8634 4611 Personal Assistant Gerard Burg +61 3 8634 2181 Kaixin Owyong Brien McDonald Senior Economist – International Senior Economist Senior Economist – Behavioural & Industry +(61 4) 77 723 768 Dean Pearson +(61 0) 436 679 908 Economics Head of Behavioural & Industry Economics +(61 3) 8634 3837 +(61 3) 8634 2331 Phin Ziebell Economist – Agribusiness Steven Wu +(61 4) 75 940 662 Economist – Behavioural & Industry Economics +(613) 9208 2929

Global Markets Research Ivan Colhoun Global Head of Research +61 2 9237 1836

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