0 Institute of International Finance China’s Economic and Financial Outlook Highlights China Economic and Financial Research Team, Institute of International Finance Head: Chen Weidong Deputy Heads: Cao Yuanzheng Zong Liang Zhong Hong Members: Zhou Jingtong Li Jianjun Li Peijia Gao Yuwei Li Yan Liang Jing WangMin (GTS Dept) Chen Zhihua (BOCIM) Contact: Zhou Jingtong Tel: 86-10-66592779 Email: [email protected]Q2 2015 (Issue 22) March 30, 2015 ● In Q1 2015, while continuing the slowdown of last year due to property market adjustments, overcapacities and weak external demands, China’s economy sees refined structure, enhanced quality and improved income distribution as well as remarkably promoted sustainability, balance and inclusiveness in development. ● Looking into the second quarter, we expect stable economic growth, given the improving external environment and the increasing effects of growth-stabilizing policies. However, economic growth will also face uncertainties caused by inertial reduction in investment, higher leverage ratio, and continued negative PPI. The Q2 GDP is predicted to grow at around 7.2%, while CPI may go up by about 1.3%. ● Under the currently high downturn pressure and low inflation, proactive fiscal policy and more flexible and targeted monetary policy are needed so as to create a favorable monetary environment for stable growth. ● Objectively speaking, stabilizing growth will increase the leverage; while in the case of high leverage ratio, “deleveraging” approaches will be required. Therefore, it is necessary to keep a balance. We suggest insisting on range-based macro-control instead of large-scale stimulus. In particular, against the backdrop of “absorbing the effects of previous economic stimulus policies”, relatively higher leverage and serious overcapacities, China needs to balance between stabilizing growth and “deleveraging”. China’s economic climate index Source: Institute of International Finance, BOC
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China s Economic and Financial Outlookpic.bankofchina.com/bocappd/rareport/201505/P... · 2015-05-20 · -- China’s Economic and Financial Outlook (Q2, 2015) In the first quarter
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● In Q1 2015, while continuing the slowdown of last year due to
property market adjustments, overcapacities and weak external
demands, China’s economy sees refined structure, enhanced quality
and improved income distribution as well as remarkably promoted
sustainability, balance and inclusiveness in development.
● Looking into the second quarter, we expect stable economic
growth, given the improving external environment and the
increasing effects of growth-stabilizing policies. However,
economic growth will also face uncertainties caused by inertial
reduction in investment, higher leverage ratio, and continued
negative PPI. The Q2 GDP is predicted to grow at around 7.2%,
while CPI may go up by about 1.3%.
● Under the currently high downturn pressure and low inflation,
proactive fiscal policy and more flexible and targeted monetary
policy are needed so as to create a favorable monetary environment
for stable growth.
● Objectively speaking, stabilizing growth will increase the
leverage; while in the case of high leverage ratio, “deleveraging”
approaches will be required. Therefore, it is necessary to keep a
balance. We suggest insisting on range-based macro-control instead
of large-scale stimulus. In particular, against the backdrop of
“absorbing the effects of previous economic stimulus policies”,
relatively higher leverage and serious overcapacities, China needs to
balance between stabilizing growth and “deleveraging”.
China’s economic climate index
Source: Institute of International Finance, BOC
China’s Economic and Financial Outlook
Institute of International Finance BOC 1 Q2 2015
Keep Balance Between Stabilizing Economic Growth and “Deleveraging”
-- China’s Economic and Financial Outlook (Q2, 2015)
In the first quarter of 2015, while continuing the slowdown of last year due to property market
adjustments, overcapacities and weak external demands, China’s economy sees refined structure,
enhanced quality and improved income distribution as well as remarkably promoted sustainability,
balance and inclusiveness in development. The Q1 GDP is estimated to grow at around 7%, 0.4
percentage points lower than the same period last year and CPI is estimated to increase by about
1.2%. Looking into the second quarter, we expect stabilized economic growth, given the improving
external environment and the increasing effects of growth-stabilizing policies. However, economic
growth will also face uncertainties caused by inertial reduction in investment, higher leverage ratio,
and continued negative PPI. The Q2 GDP is predicted to grow at around 7.2%, while CPI may go
up by about 1.3%. Under the currently high downturn pressure and low inflation, we need
proactive fiscal policy and more flexible and targeted monetary policy, so as to create a favorable
monetary environment for stable growth. Given that, a moderate easing policy is expected.
However, objectively speaking, stabilizing growth will increase the leverage; while in the case of
high leverage ratio, “deleveraging” approaches will be required. Therefore, it is necessary to keep a
balance. We suggest insisting on range-based macro-control instead of large-scale stimulus. In
particular, against the backdrop of “absorbing the effects of previous economic stimulus policies”,
relatively higher leverage and serious overcapacities, China needs to balance between stabilizing
growth and “deleveraging”. As for sector development, on the one hand, it is important to support
the service sector, especially such productive services as R&D and design, procedural optimization,
marketing and logistics; on the other hand, the “Made in China” strategy shall be carried forward.
The fundamental way for stable and sustainable economic development lies in seizing the
new-generation revolution of science and technology and upgrading “Made in China” approaches
based on the “Made in China 2025” strategy.
I. Economic Review and Outlook
I.1 Economic review for Q1
I.1.1 Economic growth drops slightly and five major changes indicate an improving economy
During the first quarter, affected by property market adjustments, overcapacities and weak external
demands, China’s economy continued its ebbing trend since last year. In the first two months,
major economic growth indicators slowed down remarkably, including investment, industrial
production and power generation. The growth of crude steel dropped by 3.5 percentage points,
while that of steal products and auto production went down by 2.8 percentage points and 7.9
percentage points respectively, indicating a big economic downturn pressure. We expect the Q1
GDP to grow at around 7%, about 0.4 percentage points lower than that of last year and that of the
same period last year.
China’s Economic and Financial Outlook
Institute of International Finance BOC 2 Q2 2015
Figure 1: China’s GDP growth Figure 2: China’s economic climate Index
Source: Wind; Institute of International Finance, BOC
In spite of the slowdown, we should recognize that China’s economy is getting better with a series
of positive changes occurring recently. China saw rapid growth of the tertiary industry and private
investments, robust profit increase in equipment and high-tech manufacturing and speedy
expansion of communications devices, information consumption and tourism, which have been the
targets of economic development for years. To a certain extent, stable economic growth is
accompanied by better structure, quality and income distribution, which is the optimal state of
economic growth and indicates that the growth is becoming markedly more sustainable, balanced
and inclusive.
First, the tertiary industry develops rapidly and becomes the main driver of employment
generation and stabilization. In 2014, the tertiary industry grew by 8.1%, 4 and 0.8 percentage
points higher than the primary and secondary industry, respectively; it occupied 48.2% of GDP, 5.6
percentage points higher than the secondary industry. During January and February 2015, the
service sector is estimated to go up by 7.4%, 0.6 percentage points higher than the industrial
production during the same period. The service-dominant tertiary industry has become a main
factor to provide jobs and stabilize employment, given its rapid growth and increasing share in
GDP. In 2014, one percentage of GDP growth created 1,786,000 new jobs, 59% higher than 2010
(which was 1,123,000); the elasticity of employment with respect to GDP (ratio of the growth rate
of working population to the GDP growth rate) changed from the downward trend in the past to
rise (Table 1).
Table 1: Changes to China’s employment elasticity
GDP growth rate(%) Growth rate of working
population(%)
Employment elasticity
1880-1990 9.2 4.3 0.465
1991-2000 10.5 1.1 0.103
2001-2010 10.5 0.54 0.052
2011-2013 8.3 0.38 0.046
2014 7.4 0.36 0.048
Source: Wind; Institute of International Finance, BOC
China’s Economic and Financial Outlook
Institute of International Finance BOC 3 Q2 2015
Second, with a refined demands structure, consumption makes a bigger contribution to
economic growth. Consumption in 2014 grew by 12% and contributed 51.2% to economic growth,
1.2 percentage points higher than the previous year. In January and February this year, the real
growth rate of consumption reached 11%, 0.2 percentage points higher than the same period of
2014. Greater contribution made by consumption to economic growth is expected in the first
quarter.
Third, emerging industries, emerging businesses and private economy show a sound
momentum and the economic growth is becoming increasingly self-sustaining. This January
and February, the added value of high-tech industries went up by 11.2% year on year, 4.4
percentage points higher than that of the industry above designated size. The added value of
equipment manufacturing increased by 8.2% year on year, 1.4 percentage points higher than the
whole industry. Stimulated by streamlined administration, delegation of powers, eased market
access control and accelerated reform on the investment and financing system, private capital is
invigorated and investments in services and other fields increase rapidly. In 2014, the number of
national newly registered enterprises went up 45.88% year on year, indicating a vitalizing market
where start-ups funded by the masses are thriving. In January and February, private investment
rose 14.7% year on year, 0.8 percentage points higher than the total investments. Internet-related
new-type businesses continued speedy expansion. In the first two months this year, national online
sales of commodities and services amounted to RMB475.1 billion, representing a year-on-year
increase of 44.6%. Online sales of commodities went up 47.4% year on year to RMB399.1 billion,
with a growth rate 36.7 percentage points higher than that of total retail sales of consumer goods,
pushing the latter up nearly three percentage points.
Fourth, progress is made in energy saving and emission reduction with a markedly smaller
elasticity coefficient of energy consumption1. In recent years, the government has been stepping
up supportive policies for energy saving, emission reduction and clean energy use. Meanwhile,
economic slowdown leads to restrained growth of traditional industries with high energy
consumption and high pollution such as iron & steel, cement and electrolytic aluminum, bringing
remarkable progress in energy saving and emission reduction. In 2014, energy consumption per
RMB10,000 GDP dropped by 4.8%, outperforming the government’s preset target of 3.9%. The
elasticity coefficient of energy consumption fell from 0.48 of the previous year to 0.30 (Table 2),
indicating new progress made in energy saving and emission reduction.
Table 2: Elasticity coefficient of energy consumption from 2010 to 2014
Year 2010 2011 2012 2013 2014
(E)
2015Q1
(E)
Energy consumption growth
(%) 6.0 7.1 3.9 3.7 2.2 1.0
GDP growth (%) 10.4 9.3 7.7 7.7 7.4 7.0
Elasticity coefficient of energy
consumption 0.58 0.76 0.51 0.48 0.30 0.14
Note: Data of elasticity coefficients in 2014 and 2015 are estimated by the author.
Source: Wind; Institute of International Finance, BOC
1.Elasticity coefficient of energy consumption is an indicator reflective of the relationship between energy consumption growth and economic growth. The calculation formula is: elasticity coefficient of energy consumption = annual average growth rate of energy consumption/annual average economic growth rate.
China’s Economic and Financial Outlook
Institute of International Finance BOC 4 Q2 2015
Fifth, income distribution is improving and residents’ income growth outgrows GDP growth.
In terms of income distribution, in 2014, disposable income per capita increased by 10.1%, or 8%
on an inflation-adjusted basis, both higher than GDP growth rate during the same period. As for
urban-rural income gap, the ratio of urban income to rural income was 2.922 in 2014, 0.11
percentage points down from the previous year (3.03), the biggest drop in the recent five years. In
respect of residents’ income distribution, the country’s Gini coefficient was 0.469 in 2014, the
lowest since 2008, indicating a big shrinkage in income gap (Table 3).
Table 3: Changes in ratio of urban income to rural income from 2010 to 2014
Year
Gini
coefficient
Urban residents'
disposable income
per capita (in RMB)
Rural residents' net
income per capita
(in RMB)
Ratio of
urban
income to
rural income
Changes in
ratio of urban
income to rural
income
2010 0.481 19109.4 5919.0 3.23
2011 0.477 21809.8 6977.3 3.13 0.10
2012 0.474 24564.7 7916.6 3.10 0.02
2013 0.473 26955.1 8895.9 3.03 0.07
2014 0.469 28844.0 9892.0 2.92 0.11
Source: Wind; Institute of International Finance, BOC
I.1.2 CPI continues the downward trend and PPI shows negative growth for 36 consecutive
months
Under the shadow of the downward economy, slowing demands growth, the one-month-late 2015
Spring Festival and diminishing carryover effect, prices continued to drop in the first quarter with
CPI (Consumer Price Index) climbing at a slower pace and PPI (Producer Price Index) dropping
further. Major characteristics of prices in the first quarter include:
First, the growth rate of CPI goes down on a year-on-year basis but rises on a
quarter-on-quarter basis. During January and February, CPI went up 1.1% cumulatively, one
percentage point lower than the same period last year and 0.9 percentage points lower than the
whole year of 2014 (Figure 3). Monthly speaking, CPI in January and February went up 0.8% and
1.4%, respectively, and the steeper rise of CPI in February was mainly connected with the rapid
price rises of food and services during the Spring Festival. It is expected that March will see a
year-on-year increase in CPI of 1% at least.
On a month-on-month basis, CPI has increased substantially from 0.3% in January to 1.2%. In
March, as the weather is getting warmer and production and transportation conditions of vegetables
and other products are improving, price rise in food will further slowdown. The Q1 CPI is
2 Ratio of urban income to rural income refers to the ratio of urban residents’ income to rural residents’ income, which is an important indicator of urban and rural income gap. The larger the indicator is, the wider the gap between urban income and rural income is. To ensure comparable calculation criteria, we adopt urban residents’ disposable income per capita and rural residents’ net income per capita to produce ratio of urban income to rural income.
China’s Economic and Financial Outlook
Institute of International Finance BOC 5 Q2 2015
estimated to grow around 1.2%, 1.1 percentage points lower than the same period last year and 0.8
percentage points lower than the whole year of 2014. Though price rise remains at a low level in
January and February and the deflation pressure seems to be growing, the deflation pressure is
actually diminishing instead of augmenting on both month-on-month and year-on-year basis.
Figure 3: CPI fluctuates at low levels Figure 4: PPI increases negatively for
36 consecutive months
Source: Wind; Institute of International Finance, BOC
Second, price rise in food, housing, transportation and communications weakens
substantially, which is the main cause for the sluggish CPI. Due to the warm winter and the
Spring Festival, food price only increased 1.7% during the first two months, 1.5 percentage points
lower year on year. Affected by property market adjustments and dropping property price, housing
price only went up 0.7%, 2.1 percentage points lower on a year-on-year basis. Since the second
half of 2014, international crude oil price has dropped substantially and domestic prices of oil
products have seen several adjustments (ten price cuts from July to December 2014), which pulled
down transportation & communications prices in the CPI basket by 2%, 1.89 percentage points
higher year on year. Prices of recreation, education and culture articles increased 1.1%, 1.6
percentage points lower year on year, which was partially attributed to the reduction in high-end
entertainment consumption and dropping tourist prices. Based on preliminary estimates, prices of
these four categories of goods and services lowered the CPI growth of the first two months by
about 1.3 percentage points.
Table 4 Changes in the eight categories of goods and services in the CPI basket (%)
Year CPI Foods Tobacco
and wine Clothing
Household
devices
Health
care
Transportation
and
communications
Recreation,
education and
culture
Housing
2011 5.4 11.8 2.8 2.1 2.4 3.4 0.5 0.4 5.3
2012 2.6 4.8 2.9 3.1 1.9 2.0 -0.1 0.5 2.1
2013 2.6 4.7 0.4 2.3 1.5 1.3 -0.4 1.8 2.8
2014 2.0 3.1 -0.6 2.4 1.2 1.3 -0.1 1.9 2.0
2014.1-2 2.2 3.2 -0.7 2.1 1.4 1.1 -0.11 2.7 2.8
2015.1-2 1.1 1.7 -0.5 2.9 1.2 1.8 -2.0 1.1 0.7
Source: Wind; Institute of International Finance, BOC
China’s Economic and Financial Outlook
Institute of International Finance BOC 6 Q2 2015
Third, PPI sees an expanding negative growth for 36 consecutive months. Due to weak
demands, overcapacities and dropping import prices, PPI in the first quarter this year continued the
negative growth for 36 consecutive months, dropping 4.6% during the first two months. The
decline was 2.8 percentage points higher than the same period last year and 2.7 percentage points
higher than the whole year of 2014 (Table 5). On a month-on-month basis, PPI drops more rapidly
in January and February. By sub-sectors, the falling PPI during the first two months is mainly
caused by the dropping prices of capital goods (-6.2%), especially the substantial price drops of
20.1% and 9.2% in the mining industry and the raw materials industry, respectively. Prices of
consumer goods generally maintain stable with prices dropping within 1% in every sub-sector. The
negative increase of PPI continued to expand during January and February, due to economic
downturn, weak market demands as well as the dropping PPIRM (Purchasing Price Index of Raw
Material, Fuel and Power) caused by decreasing prices of international crude oil, coal and iron ore.
Since March, the international crude oil price has dropped further, and the market demand remains
weak. Prices of iron ore, iron & steel etc. fluctuate at low levels. Given that, it is predicted that the