China’s Economy at a Glance – December 2019

China’s industrial sector appears to have stabilised ahead of new trade deal.

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  • The “Phase One” trade deal between the US and China has now been concluded – with an official signing to occur in January. The deal will see US tariffs that had been scheduled for implementation on 15 December suspended, and the rate on those imposed in September halved (from 15% to 7.5%). China has reportedly agreed to purchase agricultural goods worth around US$40 billion from the US (a figure many observers have doubted is actually possible). The limited rollback of tariffs suggests that this is more of a ceasefire than a resolution to the trade dispute, and risks of further escalation persist.
  • Although the “Phase One” trade deal between the US and China should provide some greater clarity around the relationship between the two countries, the improvement is modest. Despite the halving in the tariffs imposed in September, China’s manufacturers still face a more negative trade environment than they did in August this year. Our outlook for China’s economic growth is unchanged – with growth at 5.9% in 2020 and 5.8% in 2021.
  • China’s industrial production grew more rapidly in November 2019, increasing by 6.2% yoy (up from a particularly weak 4.7% yoy in October). This series has been highly volatile in recent months, with the seasonally adjusted month-on-month series produced by the National Bureau of Statistics suggesting that growth may be stabilising (with a much more modest acceleration in growth in November).
  • Fixed asset investment growth accelerated in November – up to 5.2% yoy in nominal terms (compared with 3.7% in October). It is worth noting that this rate of growth is still quite modest when compared with long term trends up to mid-2019. That said, falling prices for investment goods – driven by falling factory gate prices – mean that investment has grown more rapidly in real terms. Real investment grew by 7.3% yoy, up from 6.0% in October.
  • China’s trade surplus was slightly narrower in November – down to US$38.7 billion (from US$42.5 billion previously) – as the month-on-month increase in imports exceeded the increase in exports. The increase in trade activity was largely seasonal (rather than reflecting a strengthening in China’s economy) – with October generally a weaker month due to the Golden Week holidays at the start of the month.
  • China’s producer prices continued to fall in November – albeit slightly less rapidly than in October. The Producer Price Index declined by 1.4% yoy in November (compared with 1.6% previously). In RMB terms, commodity prices have fallen in recent months, suggesting some of the margin pressure for industrial firms evident across much of 2019 will have eased.
  • China’s recently adopted monetary policy benchmark – the Loan Prime Rate (LPR) – edged lower in mid-November, down 5 basis points to 4.15%. The LPR is based on quotes from major banks, which are expressed as a premium above the PBoC’s Medium Term Lending Facility (MLF) rate – which was cut by 5 basis points early in November. Compared with monetary policy easing in other countries, China’s rate cuts have been extremely modest, however the PBoC has scope for deeper cuts if required in the future.

For further details, please see China’s economy at a glance – December 2019