Uncertainties Persist

CHINA - Report 27 Jun 2016 by FAN Gang and Chunyang Wang

Uncertainties about growth are lingering. Fixed asset investment rose 7.5% y/y in May, a 4.2 pp plunge from Q1, and only slightly higher than the September nadir. That was due to a major drop in private investment growth, up only 0.9% y/y, a 4.8 pp fall from Q1. Value added for major industrial firms rose 6% y/y in May, flat on April, and down 0.6 pps from March. State investment grew 22%, but seems insufficient to offset the slowdown in corporate sectors.

Retail sales of consumption goods were up 10% y/y in nominal terms, down 0.3 pps from Q1. Exports fell -5.1% y/y, which returns export values to their 2012 levels. Both weak exports and imports are expected to persist over the medium term.
CPI was up 2% y/y in May, and down 0.3 pps from April, mainly due to the fall of vegetable prices. The ex-factory price index rose 0.5% m/m, but fell -4.6% y/y. PPI rose 0.6% y/y, but fell -3.8% y/y. Both producer price indices have appreciated 3.1 pps, from their highest level last year. However, if economic fundamentals deteriorate, deflation might worsen again.

In May, key financial indicators diverged. The narrow money supply, M1, jumped 23.7% y/y, up 0.8 pps from April, continuing the recent several months’ high growth rates. However, the total societal financing scale declined sharply, down -45.9% y/y. The broad money supply, M2, rose 11.8% y/y, down 1.6 pps from March. Chinese yuan deposits from non-financial institutions rose 16.8% y/y, down 2.4 pps from March.

By end of June, 2016 Chinese outbound M&A, at $111.6 billion, had already surpassed last year’s levels of $111.5 billion, and that figure was likewise a leap from around $70 billion in 2014. This is another reflection of the trend toward more global integration, an emphasis of the current government. Outgoing investment includes the official ODI through the “One Belt, One Road” national strategy. A large portion of these cross-border M&A deals took place in the technology sector, which will definitely favor China’s industrial upgrading and productivity, and generate more sustained growth.

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