CHINA’S ECONOMY

AT A GLANCE CONTENTS JUNE 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

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• China’s latest economic data continue to point to a muted recovery from COVID-19 constraints, with stronger performance from the supply side (given growth in industrial production and investment) than the demand side (with retail sales still contracting). Export markets are still constrained, meaning that these relatively weak conditions may continue. Our forecasts are unchanged – with economic growth of 1.0% in 2020 (the weakest growth rate since 1976), before increasing by 9.75% in 2021.

• Growth in China’s industrial production picked up in May, rising by 4.4% yoy (compared with 3.9% yoy in April). Although this represents a substantial improvement from the deep declines recorded in February and March, it is worth noting that this increase remains below the trend typical prior to the COVID-19 outbreak.

• Growth in fixed asset investment accelerated in May, increasing by 3.9% yoy (compared with a 0.7% increase in April and steep falls in the first quarter). Producer prices have contracted in recent months, lowering the cost of investment goods, meaning that there has been a far larger increase in real investment – up by around 8.2% yoy (from 4.4% yoy in April).

• China’s trade surplus surged in May – totalling US$62.9 billion (compared with US$45.3 billion in April). This was the largest trade surplus on record, reflecting a month-on-month fall in imports that was partly price related, while exports modestly increased from April, with medical supplies contributing to this trend.

• China’s retail sales fell again in year-on-year terms in May, albeit more modestly than in the first four months of 2020. In nominal terms, sales declined by 2.8% yoy, compared with -7.5% yoy in April and -15.8% yoy in March. Retail price inflation slowed in May, meaning that real retail sales fell by 3.7% yoy (compared with a 9.0% fall in April).

• There was another surge in credit issuance in May – totalling RMB 3.2 trillion (following on from a RMB 3.1 trillion increase in April). Bank loans only accounted for around half of this increase, with large scale government bond issuance driving non-bank credit.

• Directing credit to small and micro sized businesses remains a priority for Chinese authorities – attempting to counter the long term trends of large banks prioritising lending to large state-owned enterprises. In early June, the People’s Bank of China (PBoC) announced that it will introduce a RMB 400 billion quota to purchase 40% of SME loans issued by local banks between March and December.

2 INDUSTRIAL PRODUCTION

INDUSTRIAL PRODUCTION • Growth in China’s industrial production picked up in May, rising by 4.4% yoy Output growth picked up, but below pre-COVID-19 trends (compared with 3.9% yoy in April). Although this represents a substantial improvement from the deep declines recorded in February and March, it is % yoy 20 worth noting that this increase remains below the trend typical prior to the COVID-19 outbreak. 15

10 • Despite the modest increase in aggregate, there were notable accelerations in growth for a range of major industrial sectors – with motor vehicle output 5 increasing by 19% yoy (from 5.1% previously), while cement (up 8.6% yoy), electricity generation (4.3% yoy) and crude steel (4.2% yoy) all recorded 0 stronger growth than in April. -5 • That said, there remain concerns around the sustainability of this industrial- -10 led recovery – with demand in export markets poor (due to COVID-19 -15 countermeasures still in place) and domestic consumers still remaining 2005 2007 2009 2011 2013 2015 2017 2019 somewhat cautious. Source: CEIC, NAB Economics PMI SURVEYS ONLY SLIGHTLY POSITIVE • China’s two major manufacturing surveys were slightly positive in May. The official NBS PMI survey eased slightly – down to 50.6 points (from 50.8 points Weak domestic and export demand limiting manufacturers in April). In contrast, the Caixin Markit PMI rose to 50.7 points (compared Index with 49.4 points previously). 60

• Both surveys continue to highlight the weakness in export markets, with 55 NBS PMI COVID-19 countermeasures and higher (than pre-COVID-19) unemployment rates constraining demand in foreign countries. 50

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 in May, increasing by 3.9% SOEs continue to drive the recovery in investment yoy (compared with a 0.7% increase in April and steep falls in the first quarter). Producer prices have contracted in recent months, lowering the % yoy Nominal investment (% yoy, 3mma) 50 50 cost of investment goods, meaning that there has been a far larger increase in real investment – up by around 8.2% yoy (from 4.4% yoy in 40 40 April). Fixed asset investment Non-SOEs 30 30 (nominal) • The growth in nominal investment was driven by state-owned enterprises 20 20 (SOEs) – with SOE investment increasing by 11.4% yoy in May, compared 10 10 with a 0.1% yoy fall in private sector investment. State Owned 0 0 Enterprises • There are signs that infrastructure investment is starting to accelerate – in Fixed asset -10 -10 part reflecting the decision of Chinese authorities to bring forward local investment (real) government bond issuance. Infrastructure investment rose by 8.3% yoy in -20 -20 May. -30 -30 20082010201220142016201820202008201020122014201620182020 • On a three month moving average basis, the real estate sector has seen Source: CEIC, NAB Economics the most rapid recovery in investment – increasing by 5.4% yoy (3mma) in May – followed by infrastructure (recording no growth on the moving FIXED ASSET INVESTMENT BY SECTOR average basis, due to steep falls in March). Manufacturing investment is Real estate and infrastructure faster to recover than manufacturing continuing to decline, down by 11.0% yoy (3mma).

% yoy (3mma) • The increase in real estate investment is notable, given that Chinese 50 authorities had initially attempted to limit funds flowing into the sector – Manufacturing 40 such as excluding real estate lending from earlier monetary policy easing. 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 surged in May – totalling US$62.9 billion (compared Surplus surged to a new record in May with US$45.3 billion in April). This was the largest trade surplus on record, US$ billion (adjusted for new year effects) reflecting a month-on-month fall in imports that was partly price related, 300 while exports modestly increased from April, with medical supplies contributing to this trend. 250 Exports 200 • The largest share of China’s trade surplus is with the United States. Although the surplus has narrowed from its peak prior to the US-China 150 trade war – when it exceeded US$330 billion on a twelve month rolling Imports sum basis – it has stabilised in recent months near US$275 billion, as 100 imports from the US have retreated more rapidly than China’s exports to 50 the US. There are growing doubts that China will be able to fulfil the agricultural import provisions of the Phase One trade deal with the US, 0 which could reignite the trade war between the two countries. Trade balance -50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • China’s imports fell to US$143.9 billion in May (compared with US$154.9 Sources: CEIC, NAB Economics billion previously). In year-on-year terms, imports fell by 16.7%. CHINA’S TRADE SURPLUS WITH THE UNITED STATES Doubts grow that China can meet Phase One deal commitments • Our estimate of import volumes – which uses global commodity prices as a proxy for import prices – suggests that China’s import volumes fell by 7.3% US$ billion (12 month rolling sum) yoy (on a three month moving average basis) in May, compared with a 350 3.1% yoy (3mma) fall in average prices. 300 • That said, there were some large increases in volumes for some key 250 commodities, with crude oil imports rising by 19.3% yoy and unwrought 200 copper imports increasing by 21.1% yoy. There was also a modest increase in iron ore imports – up by 3.9% yoy. In contrast, the volume of coal 150 China trade surplus with US imports fell by almost 20% yoy. (China Customs data) 100

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0 1994 1998 2002 2006 2010 2014 2018 Sources: CEIC, NAB Economics 5 INTERNATIONAL TRADE – EXPORTS EXPORTS DIPPED IN MAY • China’s exports totalled US$206.8 billion in May (up from US$200.2 billion New export orders highlights weakness in global markets in April). However, this was a fall of 3.3% in year-on-year terms. Prospects % yoy Index for exports remain subdued in the near term – with a range of key trading 60 80 partners experiencing weaker demand due to COVID-19 countermeasures. Export values growth (LHS) 40 70 • It is unlikely that there will be a rapid turnaround in export demand in the near term, given higher unemployment rates, damage to household 20 60 balance sheets and greater consumer caution than pre-COVID-19 levels. 0 50 The new export orders measure in the NBS manufacturing PMI was at a deeply negative 35.3 points (slightly improved from 33.5 points in April). -20 40 • There were some significant differences in exports to major markets in -40 30 May. Exports to the European Union (including the UK for comparison New export orders index (RHS) purposes) surged – increasing by 14.0% yoy. In contrast, exports to the -60 20 United States fell by 1.2% yoy. 2008 2010 2012 2014 2016 2018 2020 Source: CEIC, NAB Economics • Exports to East Asian markets also fell significantly – down by 6.5% yoy. EXPORTS BY MAJOR TRADING PARTNERS However, there was a noticeable difference within this grouping – with Drop in exports to US is evident exports to Hong Kong falling by 12.1% yoy, while exports to non-Hong Kong East Asia declined by 3.4% yoy. This was lead by falls to the RMB billions (12mma) Philippines, Indonesia and Malaysia, while exports to Singapore rose. 50 Non-HK East Asia 40 European Union (incl. UK) 30 Hong Kong

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United States 10

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: CEIC, NAB Economics 6 RETAIL SALES AND INFLATION

RETAIL SALES • China’s retail sales fell again in year-on-year terms in May, albeit more Sales growth still negative, albeit less so, in May modestly than in the first four months of 2020. In nominal terms, sales declined by 2.8% yoy, compared with -7.5% yoy in April and -15.8% yoy in % yoy March. Retail price inflation slowed in May, meaning that real retail sales 25 fell by 3.7% yoy (compared with a 9.0% fall in April). 20 Nominal Retail Sales 15 • Growth in China’s consumer prices has continued to slow – with the 10 headline Consumer Price Index rising by 2.4% yoy in May, compared with 5 3.3% yoy in April. Food price growth remains the key driver of this trend, 0 however this price pressure has been easing. -5 -10 • Food prices rose by 10.6% yoy in May, down from 14.8% yoy in April. Pork Real Retail Sales -15 prices have been elevated since early 2019, reflecting the impact of the -20 African Swine Fever on China’s pork supply. In May, pork prices rose by almost 82% yoy (down from 97% yoy in April). In contrast, prices for fresh -25 fruits and fresh vegetables fell by 19.3% and 8.5% yoy respectively. 2008 2011 2014 2017 2020 Source: CEIC, NAB Economics CONSUMER AND PRODUCER PRICES • In contrast, non-food price growth remained unchanged in May, increasing Weak demand sees consumer prices ease and producer prices fall by just 0.4% yoy. This is compared with an average increase of around 1.4% in 2019. One contributor to this trend was falling vehicle fuel prices – Consumer Prices Producer Prices % yoy % yoy which dropped 22% yoy in May – however this also highlights softness in 25 100 demand. RBA Index of Commodity 20 Prices (RMB terms) (RHS) 80 Food price index (LHS) • Producer prices fell by 3.7% yoy in May, compared with 3.1% yoy in April. 15 Producer price 60 That said, the month-on-month decline was only modest, falling by 0.4% index (LHS) 10 40 (the smallest fall since January). Input costs have fallen – with Yuan denominated commodity prices down by 5.3% yoy – but producers also 5 20 face weakness in both domestic and export markets, limiting pricing power. 0 0

-5 -20 Non-food price index (LHS) -10 -40 2008 2011 2014 2017 2022008 2011 2014 2017 2020 Source: CEIC, RBA, NAB Economics 7 CREDIT CONDITIONS

NEW CREDIT ISSUANCE • There was another surge in credit issuance in May – totalling RMB 3.2 Corporate and government bonds drive non-bank surge trillion (following on from a RMB 3.1 trillion increase in April). Bank loans RMB trillion only accounted for around half of this increase, with large scale 20 government bond issuance driving non-bank credit. Jan-May 2020 15 • In the first five months of 2020, new credit issuance rose by 44.9% yoy to 10 RMB 17.4 trillion. Bank loans account for the largest share of this new Jan-May 2019 lending, however they have increased at a more modest rate – around 29% 5 yoy to RMB 10.8 trillion.

0 • In contrast, non-bank lending has increased far more rapidly – up by -5 82.4% yoy in the first five months to RMB 6.6 trillion. In stark contrast to Total social Bank loans Trust & Net Banker's Other earlier periods of stimulus (such as following the Global Financial Crisis finance Entrusted corporate acceptance and the 2012 mini-stimulus) there has not been a surge in shadow bank loans bonds bill lending. Instead, net corporate bond issuance more than doubled over this 44.9% 28.7% -29.1% 109% -81.2% 52.3% period, while government bond issuance rose by 72.1% yoy. Percentage change (yoy) Sources: CEIC, NAB Economics • Directing credit to small and micro sized businesses remains a priority for MONETARY POLICY Chinese authorities – attempting to counter the long term trends of large Modest rates cuts gives PBoC room to move banks prioritising lending to large state-owned enterprises. In early June, the People’s Bank of China (PBoC) announced that it will introduce a RMB % 6.5 400 billion quota to purchase 40% of SME loans issued by local banks between March and December. 6.0 • Although the PBoC has eased monetary policy twice in 2020 – by guiding 5.5 the Loan Prime Rate lower through cuts to its Medium Term Lending Benchmark one-year lending rate Facticity rate – it has been far more cautious than advanced economy 5.0 central banks. That said, this gives the PBoC considerable room to move if the recovery in China’s economic activity continues to disappoint. 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 Phin Ziebell Brien McDonald Senior Economist – International Economist – Agribusiness Senior Economist – Behavioural & Industry +(61 4) 77 723 768 Dean Pearson +(61 4) 75 940 662 Economics Head of Behavioural & Industry Economics +(61 3) 8634 3837 +(61 3) 8634 2331 Steven Wu John Sharma Economist – Behavioural & Industry Economics Economist +(613) 9208 2929 +(61 3) 8634 4514

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