Uncovering truth of China’s economy: Why strong production yet weak demand, positive micro data yet negative macro data Part I 09-14-2016

Recently, there are some new signs in China’s economy revealed by macro and micro data, which offer us a chance to find out the real situation of China’s economy and are important for allocating assets in the future.


 

Source: Internet


1. Strong production yet weak demand, positive micro data yet negative macro data: What’s the real situation of China’s economy?   

 

On one hand, there is a decline of growth rate both in investment and social credit financing. In July, new loan increment of RMB reached to RMB463.6 billion, RMB1.01 trillion less increase YoY. Since the beginning of this year, investment growth rate keeps falling, with manufacture investment and private investment dropping largely. In particular, the growth rate of private investment in July turned negative YoY.

 

On the other hand, sales of real estate get heated, orders of PPP (Public- Private Partnership) grow greatly, industrial production keeps stable, the consumption of coal for generating electricity stays high, the production of crude steel climbs higher, the prices of cement and glass rebound, the sales of engineering machines boost, and the enterprise profits, especially in the cyclical industries, improve more than anticipated. In August, the growth rate of coal consumption for power generation was 8.7%, a slight increase compared with 7.1% in July. In the first seven months of this year, the total profits made by industrial enterprises above designated size rose by 6.9%, 0.7% higher than that in H1 2016. In particular, the growth rate of profit in July reached to 11%. What’s more, the sales figure of excavator in August was 4,370, up by 44.9% YoY.

 

So we think the economy in real condition operates better than that reflected by macro data though the figures of social credit financing and investment appeared negative. There was probably a small cyclical re-rise in H1 2016 and the economy is in a stabilized state of L-shape development at present.

 

2. Several proofs for L-Shape Economy

 

In 2015, we once put forward that as the real estate investment touched the bottom, China’s economy development would be like L-shape for a long time.

 

This year, the macro economy operation basically verifies our prediction about L-shape economy: heated sales of real estates and lands, strong support from PPP, over expectation of supply shrink, the end of de-stocking as well as the rebound of commodity prices.

 

2.1 Sales of real estate getting heated

 

In the background of money over issue, low interest and policy encouraging people to use leverage, the sales of real estate from 2014 to 2016 get boomed, pushing the housing price to rocket.

 

The hot sales of real estate drive other relative investment and consumption. In the first seven months, accumulated sales of commercial housing grew by 26.4%, newly started floor space rose by 13.7% YoY and investment of real estate development increased by 5.3%, all of which enjoyed a large rebound compared with that in 2015. Besides, the hot sales of real estate drive other relative consumption, such as decoration, building materials, furniture and appliance.

 

Graph1: Sales on real-estate market in China (Unit: %)


Sales areas of apartments: YoY changes

New construction areas of apartments: YoY changes

Completion of development and investment on real-estate market: YoY changes

Source: Founder Securities

 

2.2 Strong support from PPP and the orders of capital construction rocketing

 

Recently, there are three issues that are over expectation about PPP: policy, practice and company performance.

 

Constricted by booming price of real estate, policy of de-leverage and expectation for raising interest rate by FED, recent monetary policy returns to neutral and prudent. In 2014 and 2015, the monetary policy leaded in the policy mix. But this year, the fiscal policy, which functions more in stabilizing economy growth, is placed in a more important position. There are usually two ways for its direction: one is to enlarge budgetary deficit (yet the deficit rate has reached to 3% this year); the other is to seek other sources of fund (PPP is a very important approach). Under the encouragement of the State Council, local governments, banks and enterprises involve actively, pushing the practice of PPP model. In the background of asset shortage and long-term interest rate going down, the will to get into PPP for other capitals increases evidently. And it’s expected that the government may offer some policy benefits, such as tax reduction, fiscal subsidy and project screening.

 

The project scale keeps growing. Since 2016, the demand for PPP projects continues to go up. According to the data from PPP integrated information platform, the figures of programs and total investment reached to 9,285 and RMB10.6 trillion at the end of June, up by 32.70% and 30.70% compared with that at the end of January.


Graph2: Investment volume of PPP projects in 2016 (Unit: trillion RMB)



Execution phase; Purchase phase; Preparation phase; Recognition phase; Total

Source: China’s Ministry of Finance, Founder Securities

 

Policies are introduced intensively. Since the concept of PPP and the framework guidance opinions for its development model were put forward officially by Ministry of Finance in 2014, the PPP projects were spread gradually in China. In 2015, more relative policies were introduced, covering guidance on project operation, mechanism of investment and financing, planning of fiscal budget, evaluation of project and distribution of rights and responsibility. With the support of these policies, this year is expected to witness the accelerated practice of PPP projects.

 

The increase of PPP manufacture orders also can be proved by much more sales of engineering machine. According to the data from Chinese Construction Machinery Business Network, the sales figure of excavator in August reached to 4,370, up by 44.9% YoY and 19.3% MoM. From the perspective of product types, the sales of both large-sized excavator and small-sized excavator achieved rapid growth, with the former increasing by 69.6% and the latter rising by 56.8% YoY. In general, large-sized one is mainly used to mining and large-scale capital construction while small-sized one to municipal engineering, park and garden construction, real estate development and so on. So it’s inferred that the price rise of black-series and nonferrous metal pushed the upturn of mining, and the urban infrastructure and PPP projects boosted sales of excavator.


Graph3: Sales of construction machinery in China


Sales of excavator: YoY change Sales of truck crane: YoY change

Sales of loader: YoY change Sales of road roller: YoY change

Sales of bulldozer: YoY change

Source: Founder Securities

 

2.3 Excess capacity is cut cyclically and administratively, and supply side was shrinked more than expectation

 

In G20 Meeting, President Xi Jinping, pointed out that China has made every effort to reduce excess capacity as it announced before. Resolving overcapacity is a major task for supply-side reform. From 2016, China plans to reduce crude steel production by 100 million - 150 million tonnes within 5 years, and decrease capacity of coal by 500 million tonnes, and lessen 500 million tonnes of coal by restructuring in 3 to 5 years. What’s more, the State Council will supervise the process of cutting excess capacity from place to place in the second half of the year.

 

Various kinds of signs indicate the positive progress in shrinking supply side, especially in coal industry. In 2016, the production of coal dropped evidently, with the production being 268 million, 263 million, 277 million and 270 million tonnes from April to July and down by 11%, 15.5%, 16.6% and 13.1% YoY, respectively, thus pushing up the reduction of inventory and the rise of price. Besides, the stock of cement showed a downtrend compared with that at the beginning of the year. The production of crude steel was 804 million tonnes in 2015, down by 2.3% YoY, marking the first time to be down in the past 10 years. Virgin Aluminum, a kind of nonferrous metal, experienced an evident decline in production since H2 2015.

 

Governments at all levels carry out the plan of reducing excess capacity strictly. In Shanxi province, 15 coal mines will be shut down, cutting the coal production of 10.6 million tonnes per year. Hebei province also publicized the elimination list, involving 16 million tonnes of ironmaking production from 39 iron and steel enterprises. Besides, Henan province declared that iron and steel industry should complete the mission of cutting excess capacity by the end of October, and the coal industry by the end of November. The State-owned Assets Supervision and Administration Commission have set the capacity-reduction schedule for central enterprises, requiring the central enterprises cut 10% of the excess capacity within two years, and clearing 345 large and medium-sized zombie enterprises within 3 years.


Graph4: Output of coal in China


Output of coal; Output of coal: MoM change

Source: Founder Securities

 

2.4  Price of commodity rebounding, company performance improving

 

After two years’ decline, the price of commodity began to rebound since early 2016, improving some companies’ financial performance. The increase can be attributed to the end of de-stocking process, heated real estate investment and sales, the support of PPP and the cyclical and administrative capacity reduction.

 

In August, PPI went down by 0.8% YoY, but rose by 4.5% compared with that at the beginning of this year, and the figure is expected to turn positive in Q4 2016. What’s more, the price of some cycle commodities, including steel, coal, cement, glass, crude oil and zinc, rebounded.


The total profit of industrial enterprises above designated size in the seven months of this year rose by 6.9% YoY, 0.7% higher than that in the first half year, with the profit in July reaching to 11%. Within it, the iron and steel industry and nonferrous metal industry contributed a lot.

 

Graph5: Finished goods inventory index in China (%)


Finished goods inventory index  

Source: Founder Securities

 

*The article is edited and translated by CCM. The original one comes from Laohucaijing.com.


About CCM:

CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets. Founded in 2001, CCM offers a range of data and content solutions, from price and trade data to industry newsletters and customized market research reports. Our clients include Monsanto, DuPont, Shell, Bayer, and Syngenta. CCM is a brand of Kcomber Inc.

 

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