Summary

Overall, December economic data continued to improve from the recovering supply and demand data in November. Industrial output and manufacturing investment accelerated while credit continued to support the growth. As a result, fourth quarter saw a weak stabilization where growth was the same as third quarter (6%). Whole year GDP growth holds steady at 6.1%. Final consumption expenditure’s contribution to GDP lessened in fourth quarter as the economy relied more on gross capital formation contribution to grow.

Despite the slower growth rate compared to the rest of the year, there was evidence of a dynamic shift as economic growth did not slow further and downward risk was further eased. However, we do not believe the bottoming meant the coming of Spring. First quarter 2020 growth still faces obstacles including previous period losses hampering business production, the climbing unemployment rate among residents, as well as potential recurrence of US-China trade disputes. Even as counter-cyclical policies continue to help, the economy will not reverse its slide without improvement of real demand.

December macro and financial markets in details:

On the manufacturing side, recovery of export conditions, strong demand from infrastructure and real estate investments, and improvements in automobile production pushed industrial output to accelerate. Nevertheless, these do not mean the economy would see a near-term stabilization or recovery. Industrial production was still weighed down by the lack of real demand and earlier business losses.

On the expenditure side, the “The three carriages”(The three components of GDP) continued to improve. Firstly, manufacturing investment jumped, bringing December fixed asset investment significantly higher. Secondly, domestic consumption growth maintained its fast pace, although real consumption slipped when adjusted for domestic inflation. Slowing of real domestic income growth and slumping wealth effect were the primary factors weighing down consumption. Thirdly, import and export improved remarkably. Among them, export rebounded not only because of the previous low level but also the US-China Phase One agreement and the cancellation of tariffs improved marginal demand. Import growth was mostly related to commodities’ price increase since November, recovery of domestic industrial production, and expansion of import program of US agricultural products.

On the financing side, the aggregate financing to the real economy (AFRE) (flow) steadily climbed thanks to acceleration of bank loan growth and slowing of off-balance-sheet borrowing(entrusted loans, trust loans and undiscounted bankers’ acceptances) decline. Although on-balance-sheet credit supply improved, particularly on the medium- to long-term side, the loans primarily served the needs of large or state-owned enterprises, debt swapping of local government financing vehicles, as well as non-standard swapping of real estate financings. For the small- to medium-sized manufacturers, financing remained uneasy, especially for those who suffering in the previous profit-loss and inadequate management

From the perspective of private equity investment, we suggest further attention on the following four aspects during 2020:

First, smart manufacturing. As the new drivers replace the old, traditional manufacturing equipment upgrades and technological investments are worth paying attention to. Some examples include artificial intelligence, 5G, and fusion of next generation information technologies with manufacturing, such as internet of things(IoT). We believe China is still early on its path to Industry 4.0. Smart manufacturing will be a key sector in the Fourteenth Five Year Plan. In addition, development and integration opportunities in other key strategic sectors might also be worth looking into, and these include new material, biotechnology, alternative fuel vehicle, renewable energy, and environmental protection.

Second, REITs. As the Chinese economy cools, the economic reform is increasingly focusing on improving investment efficiency, putting the capital stock in commercial real estate, rental apartments, and infrastructure projects to good use, enhancing the reinvestment capability, as well as guiding industrial transformation and consumption upgrades through policies. We believe regulator will officially launch public offering REITs market within 2020. Tracking closely on REITs policies and test runs, research on REITs market demands and product design, and cooperate with banks to uncover investment and financing opportunities are recommedned.

Third, new consumption. Structural downgrade of consumption cannot be ignored in the short run, so are cost-effective products and sectors. However, over the long run, consumption upgrade and high quality consumption are still the mainstream. As the downward trend prevails, we recommend focusing on investment opportunities in new target groups, new brands, and new supply chain or systems.

Fourth, Fintech and venture lending. As interest rate liberalization deepens in China, the monopoly of banks in the credit market will be gradually broken. At the same time, banks are boosting their support for the small- to medium-sized firms, and share of tech firms among bank customers is increasing. Faced with these, the banks are paying more attention to Fintech than before. And, banks are also more concerned with finding an effective way to resolve the incompatibility between the bank’s targets and the needs of tech firms. Venture lending could be a possible path to the solution. Through venture lending, banks can lock in expected investment returns through VCPE firms, which compensates for the risks taken by debt financing, expands the effective risk-return boundary, and enhances the banks’ ability to serve start-up companies. At this time, some banks have set up equity funds to cooperate with external firms, as part of their venture lending program.

On the risk side, we recommend watching out for domestic unemployment, inflation, limits of regional government finances, and the opening up of the financial industry to foreigners. Further ahead, we see unprecedented changes as a new round of technological revolution and industrial upgrades are reshaping the world. New economic drivers are replacing old ones at a faster pace. Global forces are also in the process of rebalancing. All these mean uncertainties and instabilities will be more pronounced.

Despite the increased risks and challenges, new trends and new opportunities will also emerge as the world develops. As we are in the midst of it, the best approach is therefore careful planning and knowing what to expect. Only those who keep calm and proceed in the right direction can seize the opportunities and go far.