‘Winter is coming’ for the Chinese economy

Chen Gong

In 2019, China’s year-on-year economic growth rate in the first three quarters of the year was 6.4 percent, 6.2 percent and 6 percent respectively.

Investors should be ready for ongoing fall in growth

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In 2019, China’s year-on-year economic growth rate in the first three quarters of the year was 6.4 percent, 6.2 percent and 6 percent respectively.

If such a downward trend continues, it is highly probable that in the fourth quarter the economic growth rate will fall below 6 percent.

The Fourth Plenary Session of the 19th Communist Party of China (CPC) Central Committee has just concluded and the basic guiding ideology that emphasises institutional authority has been determined. After further strengthening the institutional framework for political stability, it is almost certain that the next priority of the Chinese government will be on stabilising its economic growth.

Anbound’s research team believes that in the remaining two months of 2019, China has two major things that need to be done well.

First, China needs to steadily promote the US–China trade negotiations and strive to strike an agreement in the first phase, followed by reaching other trade agreements within an acceptable level at later stages.

The meat section of a market in China. The rising cost of pork is making beef and lamb costlier.

14th Five-Year Plan

Second, China needs to plan the economic work for 2020 in the Central Economic Work Conference at the end of the year, before the overall economic growth for this year is determined. In addition, China should plan the economic and social development goals and strategies for its 14th Five-Year Plan.

Judging from developments in October, the Chinese economy has not had a good beginning in the fourth quarter.

Some research institutions have sorted out some of the high-frequency data in October and found out that the economic operation is far less than expected. Not only that, the weakening pressure is not decreasing, but rising.

Data of production shows that there are more decreases than increases and the overall production situation is poor.

Since October, the output of crude steel in key enterprises has remained stable and the output of iron concentrate has decreased to 400,000 tonnes/day. The blast furnace operating rate fell back to 63.5 percent compared with 66 percent last month. The Nanhua Commodity Index fell back to a little more than 2,200 points at the end of the month – a decrease of nearly 60 points from the previous month. The national coal price index fell to 155 points as a whole. Among the sub-items, except for the lignite prices related to power generation, the price indices of thermal coal, clean coal, injection coal and anthracite all have declined.

Demand weaker

Manufacturing, non-manufacturing and the comprehensive Purchasing Managers’ Index (PMI) have all declined and the demand was weaker than expected. In October 2019, the manufacturing PMI was 49.3 percent, down 0.5 percentage points from the previous month, and was below the line for six consecutive months. Four of the five sub-indices have also declined, indicating that the current economic downturn is greater. The non-manufacturing PMI was 52.8 percent, down 0.9 percentage points from the previous month. The PMI of the service industry has reached a low point in recent years, and the climate of the business, finance, real estate and other industries related to production has dropped significantly. The overall PMI was 52 percent, down 1.1 percentage points from the previous month. Production, orders, inventory and price indices are all falling, reflecting the pressure of weakening demand and the difficulty of seeing an economic recovery this year.

On the other hand, the investment growth rate was stable at a low level, the manufacturing investment was low, while the real estate development investment dropped significantly.

The infrastructure investment has now gradually picked up. The China Steel Price Index of the China Iron and Steel Association (CISA) fell significantly in October. The China Steel Production Cost Index (CSPI) for the third week was 105 points, down 1.1 points from the end of last month. Looking at the major steel prices, basically all categories of steel prices have declined and the rebar prices closely related to investment have fallen to more than 3,800 yuan a tonne.

Year-on-year decline

The price factor drove the growth of nominal consumption to rise slightly but automobile consumption remained sluggish. Since October, the growth rate of the average daily sales area of commercial housing in 30 large and medium-sized cities has slowed down to 0.2 percent year-on-year. The growth rate of commercial housing sales in first-tier cities turned from negative to positive, increasing by 1 percent, a relatively low growth rate. The growth rate of second-tier cities narrowed by 7.3 percent and that of third-tier cities turned from positive to negative, decreasing by 10.1 percent. Since October, the land transaction area has decreased, and the land transaction area of 100 major cities has been minus 54.1 percent year-on-year. The decline in commercial housing land and industrial land transaction area has been expanding. The current consumption growth of building decoration, furniture and home appliances related to real estate is weak and it remains in single-digit growth. Since October, auto retail sales have continued to grow negatively. In the first three weeks, auto retail sales were minus 13 percent year-on-year. The year-on-year decline was widening, and wholesale sales were minus 10 percent year-on-year. Automobile consumption will continue to grow negatively.

Food prices expected to rise

Pork prices are still rising and the differentiation of the Consumer Price Index (CPI) and the Producer Price Index (PPI) is still expanding. As of Oct 25, the national average pork wholesale price has reached 51.01 yuan/kilogramme (kg), a year-on-year increase of 164 percent. The increase in pork prices led to a slight increase in the price of beef and mutton, which was 69,68 yuan/kg in late October, up nearly 20 percent year-on-year. Affected by this, it is expected that the price of food in October will continue to rise. The PPI rose slightly and the tail-raising factor or carryover effect dropped significantly. The year-on-year decline continued to expand. From the trend of the weekly Commodity Price Index published in October, the overall price index rebounded from the previous month. The prices of rubber, livestock, and oils rose sharply, while the prices of energy, steel and minerals declined.

Judging from the above data, the signs for the Chinese economy do not seem to be optimistic. As we have previously pointed out, the “new normal” of the Chinese economy has shown signs of derailment. From the perspective of economic phenomena, the Chinese economy can be said to be in a period of slowdown. Because of the economic structure of China and the loosening of the world’s currency, one cannot rule out the possibility of this decline to be long-term. In the short term, China’s economic growth in the fourth quarter of this year may fall below 6 percent. This major slowdown may continue into 2020.

Final analysis conclusion:
The slowdown of China’s economic growth is still continuing.

Because of the existence of structural factors, it is not easy for China to overcome and solve internal problems in the short term, while the external economic environment is not controlled by China’s policies. Overall, the market and investors need to be prepared for the continued slowdown in China’s economic growth.

Chen Gong founded Anbound Think Tank in 199. He is now Anbound chief researcher. Chen Gong is one of China’s renowned experts in information analysis. Most of his outstanding academic research activities are in economic information analysis, particularly in the area of public policy

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