FDI Meets Structural Change
Executive Summary
Fixed asset investment increased 13.8% y/y in real terms in August, its lowest growth rate so far this year. Industrial output rose 6.9% y/y, down 2.1 pps from July, likewise a significant fall, to below even the weakest growth seen during the Asian Financial Crisis. If government does not respond promptly by restoring state investment and government expenditures to normal, we expect industrial output to stay low.
Retail sales of consumer goods rose 11.9% y/y in nominal terms in August, down 0.3 pps from July. CPI rose 2% y/y, down 0.3 pps. We expect CPI to fall to around 1.6% y/y next month. The ex-factory price index of industrial products fell -1.2% y/y, and PPI fell -1.4% y/y, both down 0.3 pps from July, ending their four-month narrowing run. We believe both may be in another cycle of decreasing.
Exports rose 9.4% y/y in August, and imports fell -2.4%. The good export performance plus weak import performance pushed the trade surplus to a new high. But export delivery value rose only 5.5% y/y, a relatively low level. We expect that it will be hard for exports to rise further.
The main financial indicators show monetary policy is overly tight. The total societal financing scale fell -39% y/y. At the end of August, M2 was up 12.8% y/y, M1 up 5.7% y/y, and M0 up 5.6% y/y, down 1.9, 4.2, and 3.7 pps from last August respectively. Although we expect that the government is likely to continue relying on some fiscal instruments, monetary policy may be relaxed to certain extent, in response to the sudden slowdown in August. As confirmed by multiple authorities on September 17th, People’s Bank of China is injecting 500 billion yuan into the country's five major state-owned banks.
The Ministry of Commerce announced that FDI from January to August was $78.34 billion, down -1.8% y/y, and in August only $7.2 billion, down -14% y/y. We see the decrease as a result of economic slowdown, and uncertainties in the short-term economic situation. The recent antitrust investigations of large foreign companies can hardly be a source, since FDI is sticky, and planned over the long term. In the medium term, though, China is losing its cheap labor advantage, which mostly is present in the manufacturing sector; we’ve actually seen FDI to the service sector rise 11.4% y/y during this period.
Over the long term, even pessimistic economists expect China to surpass the United States to become the world’s largest market -- and no competitive companies will be able to afford to ignore its investments in China.
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