China’s private investors continue to limit their exposure to China’s slowing economy, despite a steady campaign to improve the investment environment.
By Brian Jackson, China Economist, IHS Global Insight
Key Points:
- Most of China’s growth indicators deteriorated in May, with a deceleration in investment and real estate being the most noteworthy drag factors.
- Chinese growth in the second quarter is now all but certain to decelerate from the first quarters 6.7%, increasing the chance of additional policy support.
- IHS forecasts China’s economy will grow 6.5% in 2016.
Industrial output:
- China’s industrial output growth was unchanged in May at 6.0% year on year.Real value-added growth in the mining sector slipped from stagnation into contraction for the first time. Within mining volume output, there was improvement for coking coal, but it contracted at a double-digit rate for raw coal, which accounts for about fourth-fifths of mining value added. Oil output also contracted at a faster pace, while natural gas output expanded at a slower pace.
- Manufacturing output accelerated to 7.2%. While a detailed breakdown of all manufacturing sectors is not yet available, an initial release indicates that both light and heavy manufacturing improved. Within light manufacturing (producing final goods for households or service sector providers), the most important improvements came from computers and communication products, transport equipment, and pharmaceuticals. In heavy manufacturing, raw chemical production accelerated most, with modest gains in machinery output and non-ferrous metals smelting, while ferrous metals smelting and pressing slipped into contraction. Improved manufacturing growth helped bolster real value added growth in utilities to 2.4%.
Investment:
- Nominal investment growth slowed to 9.6%, dropping below 10% for the first time since December 2000. In real terms, investment growth was the slowest in 59 months. The investment slowdown was deepest within industry, particularly for heavy manufacturing. The largest drag factors were slowdowns in new investment into general-purpose machinery, special-purpose machinery, non-metal mineral products (e.g. glass and cement) and power and heat generating utilities. Construction sector investments decelerated by the largest degree, down 3.8 percentage points to 1.2% growth, although its relatively small size means its impact was less significant than the aforementioned sectors.
- A shift towards public investment continued, deepening concerns about the productivity of current investment.While total investment grew 9.6%, private sector investment slowed to only 3.9%, accounting for most of the headline deceleration. Investment by state-owned enterprises and via the government budget continued to grow at faster than 20%. While the current shift towards public investment still falls short of the 2009 stimulus, it raises concerns about falling productivity of China’s capital stock in the coming several years.
- The primary regional reason for a slowdown in private investment is a 6.2 percentage point deceleration to 29.3% contraction for FAI (fixed asset investments) in China’s northeast; private investment in eastern China improved marginally to 8.0% growth. A sector breakdown of private investment also raises concerns about reform momentum and impact in the near term. Compared to the same period in 2015, the most significant slowdown in private investment growth is within services. This is despite a substantial agenda to reduce red tape for domestic private investors in new and high potential services, indicating that, despite improved market access, private investors are still waiting on the sidelines as China’s economy searches for a bottom.
Real estate:
- China’s real estate sector boom began to lose momentum.One of the only bright spots for policy makers in recent months was incredibly strong year-on-year growth rate for real estate sector indicators, with sales nearing 40% growth in April. As expected, weak base effects that propped up growth rates earlier this year are now starting to dissipate, with all floor space indicators decelerating in May. Growth rates remain very high, but this almost certainly marks the peak of China’s current real estate boom.
- Real estate volumes remain disappointing for upstream suppliers.As noted in prior months, strong year-on-year growth is mostly a result of contractions in 2014 and 2015 for most of real estate indicators, creating a very low base to grow against in 2016. In level terms, sales volumes are indeed setting new records, although new starts were only 407 million square meters during January-May, compared to 542 million during the same period in 2013. This continues to point to a dismal outlook for construction and construction materials manufacturing.
Retail:
- Nominal retail sales were essentially unchanged in May, hovering at the 10% threshold. Within retail, automobile sales accelerated, as did medicine. Furniture and building construction material sales decelerated, consistent with slower growth rates of new homes. Online merchandise sales grew at 25.9%, roughly triple the pace of total retail, indicating a still significant displacement of brick-and-mortar activity by online competitors.
Outlook:
While it was previously expected that Chinese GDP would slow in the second quarter, it is now almost a certainty. Between the first quarter and May most indicators decelerated, most notably with fixed-asset investment’s real growth slowing from 13.8% to 8.1%. In addition, financial sector value-added growth is expected to suffer considerably during the second quarter given the high base effects during the same period last year. IHS currently projects that China’s full year growth will decelerate to 6.5% in 2016 and 6.4% in 2017.