Steadily Downward Trend in 1H, While Counter-Cyclical Measures Continue

The Macro Economy and Finance

Broadly speaking, the first half of 2019 saw an extension of the slowing trend of economic growth. The GDP grew 6.3% while the second quarter growth was 6.2%, both reaching new historical lows. At the same time, monetary and fiscal policies continued to buttress the slowing economy, as we witness a wrestling between downward pressure and the resilient fundamentals trying to bottom out. Driven by fiscal and financial measures, the economy showed certain positive signs in June. Macro data, including industry value-added, fixed asset investment and total retail sales of consumer goods, pointed to improvements in certain areas, easing the previously crushing pressure on the economy. However, in general terms, the fundamentals are still weak and the sustainability of the current trend is yet to be determined.

  • June industry value-added data showed a solid rebound in industrial output. Growth of upstream mining and infrastructure-related manufacturing picked up significantly. At the same time, the demand side has not been as rosy based on PMI and inventory turnover data. Industrial production was still alternating between proactive destocking and passive inventory replenishment. Motivation was still lacking among the manufacturers.
  • Fixed assets investment snapped its downward trend since April and picked up a small increase in its growth. Among these, investments in high tech-related manufacturing, driven by supportive industrial policy and reductions of taxes and fees, rebounded solidly, pushing the entire manufacturing sector higher from its lowest point. Investments in infrastructure picked up its growth speed as funding was in place. Despite an increase in real estate investment growth speed, the overall trend in the sector was still downward.
  • On the domestic demand side, consumption growth extended the upward trend since May. However, the rebound seen in May was partially from the Labour day, while the June trend depended more on auto sales. Considering the increasing pressure from employment and the weakening effect of wealth from the stock and real estate markets, second half consumption rebound will still take time.
  • On the external demand side, both import and export shrank in June, with import shrinking more, causing the surplus to expand. Notably, the intensifying trade war between US and China significantly affected the export and import numbers. The sizable drop in processing trade export-import pointed to a supply chain exodus out of China.
  • Credit financing continued to provide strong support for the real economy, with aggregate financing accelerating its rebound. Special local government project financing debt issuance picked up speed while non-standard financing also continued to grow compared with the same period of the last year. The lending on the banks’ books slightly decreased but the overall size remained at a high level. Aggregate financing is expected to continue to support the recovery of credit lending.
  • In general, the downward pressure on the economy is still present and market confidence may be affected by the progress of Sino-US trade talks. We are closely watching the risk brought by tightening real estate financing, as well as the credit defaults among private enterprises as a result of credit stratification.

Private Equity Investments

  • On the fund raising end, the total size of newly raised funds was still at a low level, with 101.38 billion RMB raised in the first half of the year. This is a drop of 89.1% compared to the same period last year. The difficult fund raising situation saw no improvement. As explained in the last issue, the clear trend on the fund raising side is, a.) more publicly listed companies are eyeing up- and down-stream opportunities through a PE fund; b.) more local governments are working with local enterprises through co-funding into private equity invesmtent, to stimulate the local economy.
  • On the investment end, the first half of the year saw 310.9 billion RMB invested, a 25% drop from last year and a 9 percentage point increase compared to May’s decrease.
  • Among the exits, investors exited 4.5 billion RMB of their investments through domestic equity markets, continuing the downward trend as well. There was 0.9 billion more exits compared to last month, but 5 billion less compared to the same period last year. Cumulative exits amounted to 156 billion RMB from January through June, 3 times last year’s number and still at a high level. Tightening money supply and shrinking valuation remains as the contributing factors of the increased exits.
  • In terms of exit methods, share sales and M&A each took up 50% of the investment exits in June, but M&A is still the mainstream method of this year, taking up 95% of the total.