More Free Trade Zones Established

CHINA - Report 24 Dec 2014 by FAN Gang and Chunyang Wang

Executive Summary

Fixed asset investment rose 14.9% y/y in real terms in November, while industrial output fell further, up 7.2% y/y, down almost 2 pps from H1. Time is needed for the Central Bank’s November interest rate cuts to have a positive effect on real economy.

Retail sales of consumer goods in November rose 11.7% y/y in nominal terms. CPI rose 1.4%, similar to its pace since about June. The ex-factory price index of industrial products fell -2.7% y/y, and PPI fell -3.2% y/y, both larger magnitudes than before. The combination of oil price collapse and rate cuts leads us to expect prices to remain stable, though there’s a risk they’ll dip further.

Since the November rate cuts, financial institutions increased RMB loans by 852.7 billion yuan, up 228.1 billion yuan from November 2013. Due to the lagged effect of policy change, the declining trend of money supply growth hasn’t reversed. M2 was up 12.3% y/y, down 0.3 pps from October. M1 increased 3.2% y/y. M0 increased 3.5% y/y, down 0.3 pps from October.

The RMB followed the dollar in appreciating against other currencies in November, which directly hit exports. Exports in dollar terms just rose 4.7% y/y in November, down a significant 6.9 pps from October. Yet imports were still weak, and fell -6.7% y/y in particular, mainly due to weak domestic demand.

On December 12th, the State Council in China announced three more free trade zones for Guangdong, Fujian and Tianjin, a major expansion after the establishment of the Shanghai Free Trade Zone on September 29th. On November 17th, the Shanghai-Hong Kong stock connection mechanism was officially established -- a big step toward China’s capital market opening. These new policies will integrate the Chinese market further into the global economy, and become a new source of future growth. These new policies also show that the new government’s main theme is to use market-based reform to generate new growth sources, rather than to rely upon traditional policy instruments.

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