In the third quarter, the economy continued to slow down
In the third quarter of 2019, China’s GDP grew at an annual rate from 6.2% in the second quarter to 6%. The data in September was mixed, with some indicators showing signs of stabilization, indicating that policy easing eased the economic slowdown. Retail sales in September rose to 7.8% from 7.5% in August, with the decline in car sales narrowing. We expect annual retail sales to maintain an annual growth rate of around 8%, mainly supported by strong sales of consumer staples.
From January to September, fixed asset investment (FAI) growth fell from 5.5% in January-August to 5.4%, mainly due to manufacturing drag, but this was partly offset by real estate and infrastructure investment. We expect fixed asset investment growth to stabilize at around 5% to 6% in 2019. Although infrastructure investment has accelerated again, it has been offset to some extent by real estate investment cooling and manufacturing investment downturn. Due to weak global demand and higher tariffs, import and export growth has continued to contract, and may continue to slump for the rest of the year. Therefore, it is believed that this year’s GDP growth should reach 6.1%, in line with the government’s target of 6% to 6.5%.
Pig price continued CPI is difficult to fall back
Exports in September grew further in negative territory, from a negative 1% in August to a negative 3.2%, mainly due to weak external demand and higher tariffs in the United States. The decline in export growth was mainly dragged down by further deterioration of exports to the United States. In September, China’s exports to the United States fell by 22% year-on-year, a further increase from the 16% decline in August, due to the US’s addition of about $130 billion to China’s exports to the United States. A 15% tariff is imposed. The overall export growth rate in the future is still under pressure and will remain weak until the end of the year. And due to the slowdown in economic growth, the import growth rate is likely to remain sluggish for the rest of the year.
The CPI rose to 3% and is likely to rise further; the production price index (PPI) deflation remains. The Consumer Price Index (CPI) rose to 3% of the official target in September and 2.8% in August. Since March, pork price increases have been the main driver of CPI’s rise. Recently, the Chinese government has taken a number of measures to restore pig production. However, since the hog cycle usually takes 14 months to complete, these measures have limited impact on prices in the short term. Pork prices may continue to soar, which in turn will push the overall CPI to more than 3% before the end of the year, and may cause the annual CPI to rise above our forecast of 2.6%. Contrary to CPI, the PPI in September fell further from the negative 0.8% in August to minus 1.2%. PPI deflation may continue until the end of the year, despite the signs of improvement in the ring, due to the high energy price base and weak industrial demand in the context of the economic slowdown.
Given the continued downward pressure on the economy, we expect monetary and fiscal policies to continue to be loose
Monetary policy remains generally loose, and the scope and extent of the easing will depend on the progress of trade negotiations and economic performance. The central bank cut its one-year medium-term loan facility (MLF) rate by 5 basis points to 3.25% (previously 3.3%) last Tuesday (5th), which is the first time since the beginning of 2016 to cut the MLF rate. Despite the modest decline, the market is worried about the central bank’s relatively neutral monetary action, and the bond yields continue to climb in October, indicating that the central bank continues to maintain a loose stance. The downward revision of the MLF rate may be a downturn for the November 20th loan market quotation rate (LPR), which was still flat at 4.2% in October. We expect MLF interest rates to continue to fall by 5 to 15 basis points this year.
In addition, given the recent progress in Sino-US trade negotiations, we expect the central bank to cut its overall benchmark by 50 to 100 basis points during the year (previously expected to be 50 to 150 basis points). In terms of fiscal policy, in order to support infrastructure spending, the fourth quarter of local government bond issuance will use the remaining amount of last year, as well as part of the next year (reported to be as high as 1 trillion yuan), this year’s 3.1 trillion yuan place The government bond issue amount was exhausted in September. Credit growth in September was relatively stable at 10.8%, slightly higher than 10.7% in July and August. Given the steady relaxation of policies, we expect credit growth to remain at 10% to 11% for the rest of the year.
The central bank is expected to cut 50 to 100 basis points
At the opening ceremony of the 2nd China International Import Expo (5-10 days) held by President Xi Jinping, President Qian Jinping called on countries to strengthen cooperation and reduce trade barriers. He stressed that China will continue to open up its economic and financial markets and strengthen intellectual property protection, which echoes the commitments made at the recent Fourth Plenary Session. This remark was made on the occasion of the Sino-US trade negotiations continuing and moving towards the first phase of the agreement. Although Chile canceled the hosting of the Asia-Pacific Economic Cooperation (APEC) summit in the country, the Sino-US first phase agreement still It is possible to sign in November.
Since mid-2018, the government has announced a series of measures to relax restrictions on foreign-invested enterprises in the mainland financial industry. This is also a long-term appeal of US trade negotiations. China recently announced that it will completely eliminate foreign ownership restrictions in almost all financial sectors by the end of 2020. The QFII and RQFII quota limits have been cancelled in September this year, and MSCI has also increased the proportion of A-shares in its index, both of which help to promote foreign investment in the domestic stock market. China also plans to open up the manufacturing, telecommunications, healthcare and education industries, shorten the negative list of foreign capital, strengthen intellectual property protection, and establish more free trade zones.