Deleveraging amid trade war

CHINA - Report 27 Sep 2018 by FAN Gang and Chunyang Wang

Growth is weak, but can still be viewed as stable. Industrial output was up 6.1% y/y, up 0.1 pps from July and down 0.5 pps from Q2. Fixed asset investment was up 4.1%, and negative in real terms; it could decline further in the future.

CPI was up 2.3% y/y in August, and up 0.5 pps from May. There is a significant chance that CPI could rise higher. In August, producer prices continued appreciating. The ex-factory price of industrial goods, and PPI, rose 4.1% y/y and 4.8% y/y, respectively.

Retail sales of social consumption goods were up 8.8% y/y in August in nominal terms, and up 0.2 pps from July, the same rate as in Q2. Their real growth rate was 6.5% y/y in August, the same rate as in July, and down 0.8 pps from Q2. Trade increased, but the trade surplus declined. Exports rose 7.9% y/y, up 4.6 pps from Q2. Imports rose a significant 18.8% y/y, and were up 7.8 pps from Q2. Trade with the United States did not yet display any major changes, despite the beginning of the trade war in July. In particular, China's trade surplus with the United States hit $31.05 billion in August, up from $28.09 billion in July.

The monetary policy direction change has had little impact on the main financial indicators so far. At the end of August, M2 rose 8.5% y/y, down 0.3 pps from July. M1 rose 3.9% y/y, reaching record low rate, and down 1.2 pps from July.

The other major event this year besides trade war is deleveraging. Our peer analyses from institutions such as Goldman Sachs have labeled China’s deleveraging in 2018 as the chief global uncertainty risk. Leverage has indeed stabilized. In particular, at the end of Q2 2018, the leveraging ratio for the real economy, including households, non-financial enterprises and the government, has increased from 242.1% in the end of 2017 to 242.7%. At a rise of only 0.6 pps, that can be viewed as stable. The leverage ratio for financial institutions has decreased to 2014 levels, at 64.3% in Q2 2018. Though trade war puts a growth slowdown constraint on the Chinese economy, the government has still committed to deleveraging, and we view deleveraging reform as successful. Potential financial risks are consequently predicted to be containable.

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