Trade war not yet hitting trade
Growth slowed in Q3, though it remained in a stable zone, with GDP expanding 6.5% y/y, down 0.3 pps from H1. Though the most uncertain factor is the U.S.-China trade war, trade is booming: in Q3, exports were up 10.3% y/y, and up 7 pps from Q2. Imports were up 19% y/y, up 8 pps from Q2. Trade also comprises a very small share of Chinese GDP, and we are still optimistic that H2 growth will be stable.
Fixed asset investment was up 4.5% y/y, down 0.7 pps from Q2. However, for different months, investment growth rates show promising increasing patterns. In particular, investment rose 4.1% y/y in August, up 1.1 pps from July. It increased further, by 6% y/y, in September. But it’s still early to forecast that investment growth is turning firmly upward.
Consumption is stable. Retail sales of social consumption goods were up 9% y/y in nominal terms, the same rate as in Q2. CPI was up 2.5% y/y in September, after rising for four consecutive months, and up 0.7 pps from May. However, both CPI and producer prices are expected to have growth limits, due to the still-low money supply. In particular, M2 was up 8.2% y/y, basically stable since March. M1 was up 4% y/y, and has not shown signs of rebounding since the big 1.2 pps drop in August.
Besides trade war, the other major event this year 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, 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.
Despite the trade war between the United States and China, China overtook the United States to become top spot for foreign direct investment globally in H1 2018, with investment up 6% y/y to $70 billion. But the negative effects of the trade war are yet to come. On October 17th, Bridgewater Associates, the world’s largest hedge fund, registered its first private securities fund in China. Its chief investment officer talks about shifting investment to Asia, and to China in particular. Based on these data, and on anecdotal information, we continue to have confidence in China. Investors, whether in the financial or real sectors, cannot ignore China’s three key advantages: world-class infrastructure, an educated and still-cheap labor force and most of all, the country’s scale: China is potentially the world’s largest market.
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