China Economic Monitor: Q3 2020

China Economic Monitor Q3 2020 KPMG China October 2020 kpmg.com/cn Contents Executive summary 2 1 Economic trends 5 Economic revival continues as 2020Q2 growth turns positive 6 Continuously narrowed decline in fixed asset investment and accelerated improvement in real estate and infrastructure investment 9 A long way to go before the full recovery of consumption 13 Inflation driven higher by floods but the downward trend is not likely to change in the long run 16 Adequate money supply and record TSF stock growth rate in recent years 19 More targeted monetary policies to channel special funds into the real economy 21 Recovering external exports may boost foreign trade, pandemic supplies bolster exports 22 Hong Kong SAR economy 25 Global economy 27 2 Policy analysis 30 Release of the Master Plan for the Construction of the Hainan Free Trade Port 31 Financial support for the development of the Guangdong-Hong Kong-Macao Greater Bay Area 34 Implementation of Growth Enterprise Market reform and pilot registration system 37 New foreign investment negative list released 39 China's public offering REITs pilot officially launched 41 3 Special focus: China-ASEAN regional economic Integration 44 Overview of economies of Southeast Asian countries 45 Trade, investment, merger and acquisition between China and ASEAN 49 Prospects for China-ASEAN economic and trade cooperation 57 Appendix: Key indicators 58 Executive summary As the COVID-19 pandemic continues to hit the global 5.9 percentage points up from March. The economy hard, the biggest challenge since the Great manufacturing PMI stayed above the threshold of Depression looms closer. Amid such a grim outlook, so for the fourth consecutive month, and the China has been seem to be mounting an effective accelerated recovery was further evidenced by response with regard to pandemic control and other indicators, including power generation, coal reopening, showing continual recovery from the consumption and excavator sales impact of the COVID-19 outbreak. In 2020Q2, China posted better-than-expected results with GDP . On the demand side, although the contribution of bouncing back strongly at 3.2% YOY. investment to economic growth rebounded significantly, the consumption remained flat. In . All three economic sectors began to pick up speed, 2020Q2, the contribution of consumption led particularly by the secondary industry. expenditure to economic growth slumped to Specifically, the quarterly growth of value added of -73.3%, dragging it down by 2.3 percentage points. the primary sector turned positive to 3.3% YOY in However, the growth of online consumption was 2020Q2, or 0.9% for 2020H1 cumulatively. The substantial, accounting for 25.2% of total retail secondary sector saw the largest increase, as the sales of consumer goods, 1.6 percentage points up growth rate of value added jumped to 4.7% from Q1. As the government loosens pandemic quarterly YOY in 2020Q2, or -1.9% for 2020H1 restrictions, offline services return to normal and cumulatively, 7.7 percentage points up from consumer demands rally over time, offline 2020Q1. This was driven by the strong rebound in consumption may become a new economic the manufacturing and construction sectors — highlight in H2 2020. both are closer to their average in terms of growth rate — where the quarterly growth rate YOY went . In 2020H1, the growth rate of fixed asset up 14.6 and 25.3 percentage points, respectively, investment fell by 3.1% YOY, but it was 13 from 2020Q1. Meanwhile, the value added of the percentage points narrower than in 2020Q1. Real service sector grew by 1.9% quarterly YOY in estate development investment increased by 1.9% 2020Q2, or -1.6% for 2020H1 cumulatively. YOY cumulatively, turning positive for the first time Emerging services like information transmission in June, and outgrowing manufacturing (-11.7%) and finance remained stable, up 2.5 and 1.2 and infrastructure (-2.7%) investments in the same percentage points, respectively, from 2020Q1. period. However, the latter two also saw an Even accommodation and catering, the most upturn: in 2020H1, the decrease in manufacturing heavily impacted sector amid the pandemic, investment was 13.5 percentage points narrower showed early signs of recovery with a -18.0% than in Q1, and infrastructure investment has been quarterly growth YOY, 17.3 percentage points registering YOY growth for the third consecutive higher than the previous quarter. month in monthly terms. In 2020Q2, the value-added of industrial growth . In 2020H1, cumulative exports were down by decreased by 1.3% YOY, down 7.3 percentage 6.2% YOY and cumulative imports were down by points from the same period last year but 7.1 7.1%. Higher-than-expected exports in 2020Q2 percentage points narrower than Q1. With the added some momentum to the positive economic pandemic well under control across China, growth. In June, China’s exports and imports reopening efforts continued to gain momentum. In continued to pick up speed, both recording positive Q2, the YOY industrial growth remained positive growth. The 0.5% increase YOY in exports was for three months in a row, hitting 4.8% in June — mainly driven by soaring overseas demands for 2 © 2020 KPMG, KPMG Huazhen LLP, a People's Republic of China partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a private English company limited by guarantee. All rights reserved. Printed in China. pandemic control and “stay-at-home” resources, especially medical supplies and home electronics, As of 2020H1, public fiscal expenditures totalled RMB due to the rapid spread of COVID-19 all over the 11.6 trillion, with an RMB 600 billion jump from Q1 to world. In 2020Q2, China’s imports and exports Q2. Most went to social security, employment, with ASEAN— the largest trade partner of China — healthcare and poverty relief programs. RMB 2.24 continued to climb, totalling USD 297.89 billion in trillion of RMB 3.75 trillion newly added local 2020H1, a 2.2% increase YOY. That equated to government special bonds have been issued as of 14.7% of China’s foreign trade, 1.2 percentage July 14, while the remainder will be issued by the end points higher than in the same period last year. The of September. For special national bonds, RMB 720 closer partnership in value chains like electronics billion was issued as of July 16, and the remainder by manufacturing, and increased investments, the end of July. boosted the imports and exports in turn. We expect to see stronger connections between China Despite the promising outlook of economic revival, and Asian countries, including ASEAN members, in many challenges still exist —struggling SMBs, high the future. unemployment rate of key groups, and lower per capita disposable income than before the pandemic, To counteract the economic impact of COVID-19, the to name a few. Meanwhile, geopolitical risks and the People's Bank of China (PBOC) took an global economic slowdown are exposing China’ accommodative policy stance by cutting the deposit economy to greater challenges. We believe the PBOC reserve ratio twice and the Loan Prime Rate (LPR) will continue a relatively accommodative stance to twice in January–April, aiming to improve liquidity and credit policies in 2020H2. Fiscally, as the fiscal market confidence. As China’s economy revives with revenue growth rate rebounds, fiscal expenditures accelerated reopening, the Government Work Report will be accelerated with special bonds and national 2020 took a “more flexible and moderate” approach bonds fully funded. In addition, investments in new to the monetary policy, saying it will support real infrastructure, new urbanisation and healthcare are economy with “remarkably higher-than-last-year” expected to grow under the “new normal” of growth in Broad Money Supply (M2) and Total Social pandemic control. Financing (TSF), as well as innovative monetary policy tools. Globally, the spread of COVID-19 pandemic was temporarily contained in 2020Q2 in developed In 2020Q2, the PBOC turned from further economies, including the US and the EU, thanks to interest/RRR cuts to “more moderate and precise” isolation, lockdown and social distancing. However, measures in funding the real economy. First of all, it the US has recently started witnessing a second extended the RMB 1.8 trillion re-lending and re- wave of the outbreak, and the spread is accelerating discounting program launched in 2020Q1 for in emerging markets such as Brazil, Russia, India and pandemic control and SMB (Small and Medium-sized South Africa. Considering the impact on the world Enterprises). Secondly, it launched the Inclusive economy in 2020H1, the International Monetary Fund Facility for Deferred Repayment of SMBs and (IMF) downgraded its growth projection in the World Inclusive Credit Loan Program for SMBs, adding RMB Economic Outlook (WEO) Update, June 2020 by 1.9% 40 billion and RMB 400 billion, respectively, to the re- to -4.9%, stating “the global economy is projected to lending funds for SMBs. The PBOC has announced grow by 5.4% in 2021 as economic activity this year’s second round of re-lending rates cut by normalises”, 0.4% lower than previous forecasts. 0.25%, effective as of July 1, expecting to improve According to the WEO, “The slower recovery path in commercial banks’ access to lower-cost funds, which the updated forecast reflects persistent social in turn reduces the funding costs of agricultural and distancing into the second half of 2020… and a hit to smaller firms. productivity as surviving businesses ramp up necessary workplace safety and hygiene practices. As for fiscal policies, the Government Work Report For economies struggling to control infection rates, a demanded a “more proactive” stance, including a lengthier lockdown will inflict an additional toll on 3.6%+ deficit rate, a deficit of RMB 1 trillion more activity.” All these will add a higher-than-usual degree than the previous year, RMB 1 trillion of COVID-19 of uncertainty — and impacts — to the global national bonds, and newly added local government economic recovery.

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