Growth in spite of trade war
GDP was up 6.8% y/y in H1, the same rate as in H2 2017. Industrial output was up 6.7% y/y, up 0.4 pps, while investment was up 6% -- down 2.6 pps, and up only 0.3% y/y in real terms, down 3.5 pps from H1 2017. The major drop in state investment is likely the main cause for the slowdown. Possibly following the government’s de-leverage reform to reduce financial risk, state investment rose only 3% y/y, down 9 pps from H1 2017. In H1 2018, retail sales of social consumption goods were up 9.4% y/y in nominal terms, and up 7.7% y/y in real terms, down 1 and 1.4 pps from H1 2017.
CPI was up 2.2% y/y in Q1, and up 1.8% y/y in Q2, the same rate as in Q4 2017. Growth rates for producer prices weakened in February-March, but rebounded powerfully in May-June. In June, PPI rose 5.1% y/y, up 0.8 pps from May. Tightening monetary policy puts constraints on prices’ future growth. In June, M2 was up 8% y/y, down 0.3 pps from May, and down 1.4 pps from last June. That marked a new historic low.
Exports were up 4.9% y/y, down 10.1 pps from H1 2017. Imports were up 11.5% y/y, flat on H1 2017. In addition to both the United States and China raising tariffs in July, U.S. President Donald Trump on July 20th also threatened to place tariffs on every Chinese good imported to the United States from China, referring to the $505.5 billion in Chinese imports the United States took in last year. The trade war and the uncertainties it has generated is putting pressure on China’s net exports.
China’s integration with the rest of world shows no sign of slowing, despite the U.S.-China trade war. Chinese domestic investors made $47.89 billion in non-financial ODI in 2,987 overseas companies in 149 countries and regions between January and May, a robust 38.5% y/y rise. The rare decline of ODI growth in 2017 is mainly due to government regulations to curb financial risks, and to financial extension of the anti-corruption campaign. The Belt and Road Initiative mainly invests in infrastructure. The economic return should be long term, and should also benefit China from a geopolitical perspective. Countries disappointed in Trump’s retreat from globalization may also become more welcoming to China.
The yuan has depreciated 5% against the dollar since mid-June, continuing its downward trend. The yuan has been depreciating against other currencies, as well. Trade and the U.S.-China relationship uncertainty might explain the depreciation. However, yuan depreciation may compensate partially for Chinese exports to the United States during the trade war. Moreover, depreciation can boost Chinese exports to other countries. With net exports taking up only a small share of Chinese GDP, we don’t expect the trade war to levy a heavy negative impact on the Chinese economy.
Now read on...
Register to sample a report