Continued Slowing of Economic Growth Necessitates More Counter-Cyclical Adjustment from Government
May economic data has shown that despite the tax and governmental fee cuts along with marginal improvements of the general financing conditions, the real economy's growth is still decelerating. Under the current policy, manufacturing, consumption, investment and trade have all shown a downward trend. Compounded by external uncertainties, second quarter growth is expected to be weaker than the first.
1. Macroeconomics and finance
- In May, industrial output data showed no effective stimulation from cuts of governmental fees and taxes. January to May industrial growth further slows. This can be attributed to a low level of willingness to produce and active destocking among the manufacturers.
- Fixed asset investment growth further slowed in May, with silver linings. First, manufacturing sector, which we watch closely, bounced back, which is a good signal. However new policies are coming out in June to support the issuance of specifically targeted debts. As a result, the estimate for the whole year is still one of smooth growth overall.
- On the domestic demand side, the lengthening and delaying of May holidays caused May retail consumption to bounce back as expected. If we exclude the single month outlier, indigenous retail growth is still weak and will extend its slowing trend. As previously discussed, the retail slowdown is across the board rather than structural.
- On the external demand side, excluding factors in this month, export and import are oscillating downward. Despite the restart of trade talks at the end of June, the technological competition will be long term, and the mechanical and electronic items take up 44% of all exports, making it the biggest component. It is our estimate that on the medium and long terms, the trade talks will not reverse the downward trend among import and export goods.
- Aggregate Financing to the Real Economy remain at a low level. May financing figures are steady from April but there was a significant year-on-year growth because of last year’s low basis. Note that the new lending focused on short-term needs of residents and enterprises while medium-to-long term lending declined markedly. This points to a decrease in appetite for credit in the real economy, while the growth is mainly supported by medium to short term loans and the SMEs under policy guidance. As the economy slows, the polarization of credit availability further stratified the market, which in turn becomes brittle.
- Exchange rates and cross-border fund flows are further impacted by US-China trade talks. Risk averse sentiment was on the rise following the drastic fall of RMB against the dollar. The exchange rate did not stabilize and rebound until a new round of US-China talks were confirmed at the end of June. Similarly, there was a net outflow of funds in the Shanghai- and Shenzhen-Hong Kong Stock Connect programs in May. The primary consideration for foreign A-share investors is still the short-term change in US-China relationship. The long term decisions depend on the economic growth in China.
- Overall, the economy is still in a downward trend. There are a few bright spots from governmental policy support, but the sustainability of them are questionable in this increasingly uncertain environment. If trade conditions are still adverse and the risks increase, counter-cyclical policy adjustments are expected to become more pronounced. Real estate financing has been tightening, but much depends on the economy. Even if the government stops the speculations on real estate, macro-control of the housing market might still be loosened. We are closely watching the possible changes from the US-China talks at the end of June, credit risks caused by stratification of the credit market, as well as their impact on the systemic risks.
2. Private equity investments
In May, newly raised private equity investments marked a new low for the year. The difficulty to raise funds became more pronounced. Local governments and listed companies are important LP’s in these fund raises. Among them, public companies zero in on M&A opportunities within its sector, while paying attention to its strategies in particular small sectors. They do this to reinvent themselves. Local governments on the other hand attract investments and curate local economy through private equity.
- Investments increased on a month-to-month basis in May. Information technology and internet-based retail are two major hot areas, followed by healthcare and finance.
- On the exit side, the decline in exit from investments continues, while still at a high level of three times that of same period of last year. M&A is the favored exit method for this year.