China‘s Macroeconomic Outlook: Quarterly Forecast and Analysis Report, October 2018 [1st ed.] 978-981-13-6076-3, 978-981-13-6077-0

Table of contents :
Front Matter ....Pages i-xvii
China’s Economic Performance in the First Half of 2018 ( Center for Macroeconomic Research)....Pages 1-15
Quarterly Forecast for 2018–19 ( Center for Macroeconomic Research)....Pages 17-30
Policy Simulation: Effects of Changes in the Household Debt Ratio on China’s GDP Growth ( Center for Macroeconomic Research)....Pages 31-42
Policy Implications and Suggestions ( Center for Macroeconomic Research)....Pages 43-48
Back Matter ....Pages 49-57

Citation preview

Current Chinese Economic Report Series

China’s Macroeconomic Outlook Quarterly Forecast and Analysis Report, October 2018

Current Chinese Economic Report Series

Editorial Board

Editorial Staff Lianshui Li, Zhanyuan Du, Zaiwu Gong, Caihua Yu, Caihong Zhou, Jun Lin, Wei Sun, Changping Xu, Minjie Wu, Nian Zhong, Feixue Zhou, Changkai Wang, Mingyang Zhang, Yulin Chen, Zhonghua Cheng

More information about this series at http://www.springer.com/series/11028

Center for Macroeconomic Research

China’s Macroeconomic Outlook Quarterly Forecast and Analysis Report, October 2018 By the China’s Quarterly Macroeconometrtic Model (CQMM) Team

123

Center for Macroeconomic Research Xiamen University Xiamen, Fujian, China

ISSN 2194-7937 ISSN 2194-7945 (electronic) Current Chinese Economic Report Series ISBN 978-981-13-6076-3 ISBN 978-981-13-6077-0 (eBook) https://doi.org/10.1007/978-981-13-6077-0 Library of Congress Control Number: 2018930244 © Springer Nature Singapore Pte Ltd. 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

This report is a partial result of the China’s Quarterly Macroeconometric Model (CQMM), a project developed and maintained by the Center for Macroeconomic Research (CMR) at Xiamen University. The CMR is one of the Key Research Institutes of Humanities and Social Sciences sponsored by the Ministry of Education of China, focusing on China’s economic growth and macroeconomic policy. The CMR started to develop the CQMM for the purpose of short-term forecasting, policy analysis, and simulation in 2005. Based on the CQMM, the CMR and its partners hold press conferences to release forecasts for China’ major macroeconomic variables. Since July 2006, 24 quarterly reports on China’s macroeconomic outlook have been presented and 11 annual reports have been published. This 25th quarterly report was presented at the Forum on China’s Macroeconomic Outlook and Press Conference of CQMM on October 25, 2018. This conference was jointly held by SOAS London University, Xiamen University, and Economic Information Daily in London, UK. Xiamen, China

Center for Macroeconomic Research Xiamen University

v

Acknowledgements

According to the Chinese Pinyin order of their names, the 110 experts who joined this questionnaire survey were: Bai Peiwen, Chang Xin, Chen Changbing, Chen Gong, Chen Heng, Chen Jianbao, Chen Jinmei, Chen Kunting, Chen Langnan, Chen Lei, Chen Menggen, Chen Shoudong, Chen Yanbin, Chen Zhiyong, Dai Kuizao, Deng Xiang, Dong Ximiao, Dong Zhiyong, Fan Conglai, Fan Ziying, Gao Bo, Guo Qiyou, Guo Xibao, Guo Xiaohe, Guo Zhiyi, Han Zhaozhou, He Jingtong, Hu Ridong, Huang Jianhui, Huang Xianfeng, Jian Xinhua, Jiang Yongmu, Li Chunqi, Li Haizheng, Li Jianwei, Li Jun, Li Junsheng, Li Shi, Li Xuesong, Li Yingdong, Lin Xuegui, Liu Jianping, Liu Jinquan, Liu Qiongzhi, Liu Shiguo, Liu Xiaoxin, Liu Zhibiao, Ma Ying, Peng Shuijun, Peng Suling, Chu Wan-wen, Ren Baoping, Ren Ruoen, Shao Yihang, Shen Kunrong, Shen lisheng, Shi Jinchuan, Su Jian, Sun Wei, Qin Wei, Tang Jijun, Wang Tongsan, Wang Yida, Wang Guocheng, Wang Jiping, Wang Junbo, Wang Liyong, Wang Shusheng, Wang Yanxing, Wang Yuesheng, Wen Chuanhao, Wu Kaichao, Wu Xinru, Xian Guoming, Xie Pan, Xu Bin, Xu Wenbin, Yan Ping, Yang Chengyu, Yang Cuihong, Yao Huiqin, Ye Chusheng, Yi Xianrong, Yin Xingmin, Yu Li, Yu Zuo, Yuan Fuhua, Zang Xuheng, Zeng Wuyi, Zhang Fan, Zhang Hongliang, Zhang Liqun, Zhang Liancheng, Zhang Long, Zhang Mingzhi, Zhang Ping, Zhang Shuguang, Zhao Changhui, Zhao Xindong, Zhao Zhenquan, Zhao Zhijun, Zheng Chaoyu, Cheng Yuk-Shing, Zhong Chunping, Zhou Liqun, Zhou Zejiong, Zhu Baohua, Zhu Jianping, Zhu Qigui, and Zhuang Zongming. The experts who joined this questionnaire survey are from institutions like Department of Macroeconomic Research of DRC (Development Research Center of the State Council), Center for Forecasting Science of CAS (Chinese Academy of Sciences), Academy of Mathematics and Systems Science of CAS, Institute of Finance and Banking of CASS, Institute of Economics of CASS, Institute of Quantitative and Technical Economics of CASS, National Academy of Economic Strategy of CASS, Institute of World Economy and Politics of CASS, Ministry of Commerce, Ministry of Finance, Hengfeng Bank, Minsheng Bank, The Export-Import Bank of China, China Banking Association, Taiwan Academia Sinica,

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Acknowledgements

Chung-Hua Institution for Economic Research, Tianze Institute of Economic Research and universities like Xiamen University, Shanghai University of International Business and Economics, the University of Hong Kong, Fujian Normal University, Liaoning University, Zhejiang University of Technology, Lingnan College of Zhongshan University, Dongbei University of Finance and Economics, Beijing Normal University, Jilin University, Renmin University of China, Zhongnan University of Economics and Law, Zhejiang University of Finance and Economics, Sichuan University, Peking University, Nanjing University, Shanghai University of Finance and Economics, Wuhan University, East China Normal University, Lanzhou University, Jinan University, Nankai University, Huaqiao University, Hunan University, Georgia Institute of Technology, Central University of Finance and Economics, Xi’an Jiaotong University, National Taiwan University, Northwest University, Beihang University, Zhejiang University, Guangxi University, Tianjin University of Commerce, City University of Hong Kong, Chongqing Technology and Business University, Southwestern University of Finance and Economics, Shaanxi Normal University, China Europe International Business School, Fudan University, Tianjin University of Finance and Economics, Shandong University, Hong Kong Baptist University, Capital University of Economics and Business, Huazhong University of Science and Technology, Anhui University of Finance and Economics, Shanghai Jiao Tong University, The Hong Kong University of Science and Technology. Finally, we thank for the active participation and insights of these experts mentioned above sincerely. Grants: The major projects of China National Social Science Foundation (15ZDC011, 13&ZD029), the major research projects of philosophy and social sciences of China’s Ministry of Education (16JZD016, 15JZD016, 14JZD011), the key research projects of the Key Research Institutions of Humanities and Social Sciences of China’s Ministry of Education (18JJD79007, 18JJD790008, 17JJD790014), the general project and the youth project of China National Social Science Foundation (17BJY086, 15BJL008), the youth project of China Natural Science Foundation (71503222).

Contents

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1 China’s Economic Performance in the First Half of 2018 . . . . . . . 1.1 GDP Growth Declined Slightly, and Consumption Was Still the Main Driver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Consumption Growth Slowed Down, and Motor Vehicles Consumption Became the Main Factor . . . . . . . . . . . . . . . . . . 1.3 The Growth of Investment in Manufacturing Edged up, While the Growth of Infrastructure Investment Declined Significantly and that of Investment in Real Estate Development Maintained Stable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 The Trade Surplus Shrunk Significantly, While the Trade Surplus with the US Kept Rising . . . . . . . . . . . . . . . . . . . . . . . 1.5 The CPI Remained Low and the PPI Rebounded Slightly . . . . . 1.6 The Grow Rate of M2 Hit a New Low, and Shrinking Non-standard Financing Suppressed Social Financing . . . . . . . . 1.7 The Growth Rate of Fiscal Revenues Was Relatively High, and that of Land Transfer Income Continued to Rise . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Quarterly Forecast for 2018–19 . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Assumptions on Exogenous Variables . . . . . . . . . . . . . . . . . . 2.1.1 GDP Growth of the US and the Euro Zone . . . . . . . . . 2.1.2 The Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 The Broad Money Supply (M2) . . . . . . . . . . . . . . . . . 2.2 Scenarios Planning to Simulate the Impact of Sino-US Trade Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Quarterly Forecast of China’s Key Macroeconomic Indicators in 2018–19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Projected GDP Growth . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Projected Growth of Exports and Imports . . . . . . . . . . 2.3.3 Projected Growth of Investment . . . . . . . . . . . . . . . . .

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2.4 Projected Growth of Other Key Macroeconomic Indicators . . . . . . 2.4.1 Projected Growth of Key Price Indicators . . . . . . . . . . . . . 2.4.2 Projected Growth of Residents’ Income and Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Policy Simulation: Effects of Changes in the Household Ratio on China’s GDP Growth . . . . . . . . . . . . . . . . . . . 3.1 Changes in the Household Debt Ratio . . . . . . . . . . . 3.2 The Transmission Path of the Household Debt Ratio Affecting Macroeconomic Operation . . . . . . . . . . . . 3.3 Scenario Simulation and Result Analysis . . . . . . . . .

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Debt .......... ..........

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4 Policy Implications and Suggestions . . . . . . . . . . . . . . . . . . . . . . . . .

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Appendix: Report on the Questionnaire Survey on China’s Macroeconomic Situation and Policy in 2018 . . . . . . . . . . . . .

49

Principal Investigator Min Gong

Research Team Members Changlin Yu, Guifu Chen, Huakun Wu, Jing Li, Shengrong Lu, Yanwu Wang, Yu Liu, Zhiyuan Lin The Chinese edition of this report is contributed to Min Gong, Huakun Wu, Yanwu Wang, Zhiyuan Lin, and Guifu Chen. It is revised by Min Gong and translated by Zhiyuan Lin and Guifu Chen. The raw data are processed by Huakun Wu.

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Executive Summary

In the first half of 2018, China’s real GDP grew by 6.8% YoY, indicating that the Chinese economy continued its steady growth. Driven by the rapid growth of exports, manufacturing investment and private investment maintained a good momentum of development, and consumption continued to be the main driving force for economic growth. On the supply side, in addition to the steady GDP growth, the growth rate of the industrial value added also stays stable in the range of 6.6*6.9%. The Chinese economy showed considerable resilience. In the first half of 2018, China’s economic performance was manifested in the following aspects: (a) GDP growth declined slightly, and consumption was still the main driver; (b) consumption growth slowed down, and motor vehicles consumption became the main factor; (c) the growth of investment in manufacturing edged up, while the growth of infrastructure investment declined significantly and that of investment in real estate development maintained stable; (d) the trade surplus shrunk significantly, while the trade surplus with the USA kept rising; (e) the CPI remained low, and the PPI rebounded slightly; (f) The growth rate of broad money (M2) hit a new low, and shrinking nonstandard financing suppressed social financing; (g) the growth rate of fiscal revenue was relatively high, and that of land transfer income continued to rise. However, since the third quarter of 2018, the downward pressure on the Chinese economy has begun to increase. First, in terms of investment, the growth of investment continued to drop sharply. Affected by strengthening financial supervision and rectifying the financial order, contracting credit supply, and almost closing of sources of funds other than domestic loans, the growth rate of infrastructure investment fell sharply to 7.3% in the first half of 2018, down 13.8% points compared with the same period of the previous year. And that of real estate development dropped to only 4.6%, down 6.6% points over the same period last year. As the growth of manufacturing investment continued to slow down, the investment in fixed assets (excluding farmers) in the whole society increased by 6.0%, a sharp decline of 2.6% points from the same period of the previous year. Second, in terms of foreign trade, the trade dispute unilaterally provoked by the USA has not only disrupted the world trade order, but also begun to impact China’s xiii

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Executive Summary

foreign trade. Although in the short run the Sino-US trade dispute would have limited negative impact on China’s GDP growth through trade channels, in the long run it would have a relatively significant impact on private investment oriented by manufacturing exports and even reverse the upward trend of the private investment growth. Finally, in terms of consumption, as the growth of residents’ real income continued to edge down, coupled with the rapid increase in housing loans in the past two years and markedly increasing household debt ratio, it would be difficult for the growth of household consumption spending to improve quickly. In view of the current complicated international economic situation, we design two different scenarios of Sino-US the trade disputes: Namely, Scenario 1: from the end of the year to next, the Sino-US trade disputes would no longer escalate. As a result, China and the USA implement the scale of duties and the tariff rates that have been announced; and Scenario 2: the trade disputes would further escalate. And thus, both sides would not only expand the scale of duties, but also increase the punitive tariff rates. Based on the China’s Quarterly Macroeconometric Model (CQMM), we conduct forecasts on the key indicators of China’s macroeconomics this year and next. The results show that, due to the trade transfer effect, China’s current foreign trade with the characteristic of processing trade, and China’s macroeconomic policies to stabilize economic growth, the negative impact of Sino-US the trade disputes on China’s GDP growth via trade channels in the short run would be limited, and the downward pressure on China’s economic growth would be largely due to slowdown in the growth of investment and consumption. In the above two scenarios, the prediction results of the CQMM are given as follows: 1. In 2018, China’s GDP growth rate is expected to fluctuate in the range of 6.58*6.64%, 0.26*0.32% points lower than that in 2017. In 2019, it is projected to drop further to the range of 6.42*6.48%. Quarterly, in the fourth quarter of 2018 it is set to fall back to the range of 6.23*6.46% and in the first quarter of 2019 drop further to the range of 6.20*6.36%. In these two quarters China’s GDP growth is anticipated to be most affected by the trade shocks. Since then, due to the trade transfer effect, the corresponding decline in the growth of imports induced by the fall in the growth of exports, and China’s macroeconomic stabilizing policies, the GDP growth is expected to edge up. 2. In 2018, the growth rate of the value of exports measured by the current RMB prices is projected to remain in the range of 8.72*9.08%, down 1.72*2.08% points compared with 2017. In 2019, it is forecast to stay at the interval of 9.08*10.02%. In 2018, the growth rate of the value of imports measured at current RMB prices is anticipated to fluctuate in the range of 16.99*17.13%, down 1.57*1.71% points compared with that in 2017. In 2019, it is set to drop to the interval of 14.04*14.88%. 3. It is noteworthy that since exports from non-SOEs (including private enterprises and foreign-invested enterprises) account for nearly 90% of China’s total exports, the Sino-US trade disputes would directly impact investment by

Executive Summary

xv

non-SOEs that are oriented toward manufacturing exports. The CQMM predicts that under the above two scenarios, the growth rate of investment by non-SOEs is projected to remain in the range of 7.95*8.14% in 2018. In 2019, it is expected to drop significantly to the interval of 4.12*4.62%. Since private investment accounts for over 60% of total investment in the whole society, the Sino-US the trade disputes would curb and reverse the rapid rebound in the growth of private investment since 2017. As a result, the growth rate of investment in fixed assets (excluding farmers) in the whole society measured at current prices in 2018 is forecast to stay in the range of 5.49*5.61%, lower than the level of 7.2% in 2017. In 2019, it is anticipated to further drop to the interval of 4.15*4.45%. 4. In 2018, the CPI is expected to rise by 2.09%, an increase of 0.49% points over 2017. In 2019, the relatively loose monetary policy is projected to boost the increase of CPI to 2.50%. In 2018, the increase of PPI is forecast to rise by 3.09%, down 3.21% points over 2017. In 2019, it is set to further fall to 1.16%. Overall, the inflation rates would still be controllable this year and next. 5. Due to the slowdown in the growth of labor productivity, the residents’ real income growth is still in the downward trend. In 2018, the per capita disposable income of urban residents is expected to go up by 5.73%, a decrease of 0.77% points compared with that in 2017. In 2019, it is projected to rebound to 6.06%. Meanwhile, the per capita cash income of rural residents in 2018 is anticipated to pick up by 9.21, 0.75% points lower than that in 2017, and further decline to 8.18% in 2019. The total retail sales of social consumer goods measured at current prices are set to expand by 9.34%, down 0.96% points over 2017. In 2019, it is forecast to rebound to 9.74%, but still lower than that in 2017. In addition, in view of the rapid expansion of China’s household debt scale and the rapid increase in debt ratio, based on the CQMM, we conducted a counterfactual analysis of the impact of changes in the household debt ratio on China’s household consumption, investment, and economic growth. The transmission mechanism is described as follows: The change in the household debt ratio will directly affect both the household loans and the household deposits. On the one hand, changes in the household deposits will change the price of funds, i.e., interest rate, through changes in demand for funds, and thus change the investment demand of enterprises with different ownership. This is the so-called investment channel that changes the household debt ratio and affects investment demand. On the other hand, changes in household debt ratios will directly affect household consumption and household deposits; this is the so-called consumption channel that changes in household debt ratio affect consumer spending. And when changes in the household debt ratio affect household deposits, the loan-to-deposit ratio of the funds market will change the price of funds, which in turn will affect the investment. Assume that the household debt ratio in 2016 and 2017 remains at the level of 38.8% in the fourth quarter of 2015, which are 5.6 and 9.6% points lower than those in the actual situation. The counterfactual analysis based on the CQMM shows that the consumption channel effect of changes in the household debt ratio would be

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Executive Summary

stronger than the investment channel effect, indicating that suppressing the increase in the household debt ratios would be conducive to accelerating the growth of consumer spending. Nonetheless, the decline in the household debt ratio would result in a decline in the growth of household saving deposits, which in turn would reduce the supply of credit funds and increase the price of funds, resulting in a decline in investment growth, especially of private enterprises lacking diversified financing instruments. Combining the above two effects, the decline in the household debt ratio would eventually increase the economic growth rate slightly. In 2016 and 2017, China’s GDP growth would increase by 0.01 and 0.06% points, respectively, compared with the baseline value. Although reducing the household debt ratio would have only a weak effect on economic growth, it would be conducive to promoting the structural adjustment of the economy. In summary, in the face of the downward pressure on China’s current economy, there are two issues that deserve high attention: The first is the negative impact of the current trade disputes on private investment and manufacturing investment, and the second is the negative impact of the rapid rise in the household debt ratio to household consumption growth. First, we should pay much attention to the negative impact of the current Sino-US trade disputes on private investment and manufacturing investment. If the growth of private investment would not substantially rebound, the slowdown in the growth of investment in fixed assets in the whole society would curb economic growth. With the economic slowdown, the local government’s demand for infrastructure expansion and its dependence on land finance, as well as the financial sector’s preference for SOEs and the real estate industry, would come back. And it would be difficult to reverse the situation that credit resources are deviating from the real economy to the virtual economy or idling within the financial system. Therefore, if the Sino-US trade war continued to escalate, while preventing and controlling financial risks, it would be necessary to effectively stimulate private investment, improve resource allocation efficiency, promote the transformation and upgrading of China’s manufacturing industry, and improve labor productivity. To this end, we propose the following suggestions: a. While controlling the total amount, monetary policy should pay attention to maintaining a reasonable and sufficient liquidity and focus on adjusting the credit structure to ensure that the proportion of loans to non-financial enterprises and government organizations is stable at more than 50%, so as to we reverse the situation that credit resources are deviating from the real economy to the virtual economy. b. Full consideration should be given to the financial risks and market tolerance faced by de-leveraging policies. While grasping the supervision efforts, we should coordinate the timing of the introduction of various policies and improve the linkage of financial supervision systems at all levels. Preventing financial risks and serving the real economy should be parallel. In addition, effectively improve the ability and willingness of financial services to the real economy.

Executive Summary

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c. Continue to implement active fiscal policy, adopt measures such as tax cut and fee reduction, and cooperate with monetary policy to ensure that liquidity actually enters the real economy. Meanwhile, stimulate the development of small- and medium-sized enterprises and promote the upgrading of industrial structure. Second, we should pay much attention to the negative impact of the rapid rise in the household debt ratio to household consumption growth. China’s household debt ratio has surpassed the average of emerging economies in 2011 and has since gradually widened the gap. The difference with developed countries has also shrunk dramatically. Under the background of China’s aging population, the far from perfect social security system, and the still grim urban-rural income gap, especially as the growth of the residents’ real income edges down due to the slowdown in labor productivity growth, the rapidly rising household debt ratio will slow the growth of household consumption and hinder the transformation of economic growth patterns. To this end, we put forward the following suggestions: a. As the unprecedented expansion of the current housing loan scale is the main reason for the sharp increase in the household debt ratio, we should vigorously rectify various irregularities in loans for real estate development. While limiting domestic loans flow into real estate investment, we should continue developing the housing leasing market and promote the equilibrium of supply and demand in the regional housing market. b. Further promote the reform of the fiscal system to help local governments get rid of their dependence on land finance. In the past decade, as the impact of the global financial crisis led to a sharp decline in the growth rate of profits of industrial enterprises, the growth rate of fiscal revenues with the industrial tax as the main source of taxation also fell sharply. Local governments have therefore begun to increase their reliance on land finance, which directly pushed up the bubble in real estate. In order to reverse the current situation that local governments depend on land finance, the implementation of real estate tax is imperative. In addition, the reform and improvement of the fiscal system should ensure the matching of the local government financial resources and expenditure responsibilities.

Chapter 1

China’s Economic Performance in the First Half of 2018

In the first half of 2018, China’s real GDP grew by 6.8% YoY, showing that the Chinese economy continued its steady growth. Although the growth rate of investment and consumption, which are measured by the investment in fixed assets (FAI) in the whole society and the total retail sales of social consumer goods, respectively, dropped to the lowest in recent years, the domestic demand reflected by total asset formation and final consumption expenditure was not weak.1 On the supply side, in addition to the steady GDP growth, the growth rate of the industrial added value also stayed stable at the interval of 6.6–6.9%. The Chinese economy showed considerable resilience. Specifically, in the first half of 2018, China’s economic performance was manifested in the following aspects.

1.1 GDP Growth Declined Slightly, and Consumption Was Still the Main Driver In the first half of 2018, China’s GDP reached 41.96 billion yuan, a real increase of 6.8% and 6.7% YoY in the first and second quarter, respectively, showing a slight decline. For the twelve consecutive quarters, China’s real GDP growth rates 1 Typically, the growth

of the total retail sales of social consumer goods has continued to fall, while the contribution of final consumption expenditure to GDP growth has increased rapidly since 2015. The main reason is that, though both of them are taken as measurement of consumption, they have different specifications. Compared with the final consumption expenditure, the total retail sales of social consumer goods include consumption by social groups, but do not include residents’ service consumption and government service consumption. Due to the slowdown of the growth of the total retail sales of consumer goods by social groups and accelerating growth of residential service consumption and government service consumption, there has been a divergence between the growth rate of the total retail sales of social consumer goods and the contribution of final consumption expenditure to GDP growth (Huang and Dong 2008). © Springer Nature Singapore Pte Ltd. 2019 Centre for Macroeconomic Research, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-13-6077-0_1

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1 China’s Economic Performance in the First Half of 2018

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Fig. 1.1 Shares of the three components of GDP by expenditure approach to GDP growth: cumulative, YoY, %. Source CQMM team calculations on CEIC data

maintained a range of 6.7–6.9%. By expenditure approach, shares of final consumption expenditure, gross capital formation, and net exports, to GDP growth were 78.5, 31.4 and −9.9%, respectively, changes in 19.7, −0.7 and −19.0 percentage points respectively compared with those in the previous year (see Fig. 1.1). And their contributions to GDP growth were 5.3, 2.1 and −0.7 percentage points, respectively. Expenditure on consumption has become the main driver for China’s economic growth. The small fluctuations in the contribution of investment to GDP growth were mainly attributed to the high growth of real estate investment, which offset the sharp decline in the growth of infrastructure investment (see Fig. 1.2). Of the three industries, contribution of primary, secondary and tertiary industries to GDP stayed basically stable at around 6:40:54 (see Fig. 1.3).

1.2 Consumption Growth Slowed Down, and Motor Vehicles Consumption Became the Main Factor In the first half of 2018, the total retail sales of social consumer goods reached 18.08 trillion yuan, a nominal increase of 9.4% YoY, and a real increase of 7.7%, down 1.0 and 1.6 percentage points from the same period of the previous year (see Fig. 1.4). Of the total retail sales of consumer goods above designated size, the six largest categories are: motor vehicles; petroleum and related products; food, beverage, tobacco, and liquor; textiles, wearing apparel and household articles; household electric appliances and electronic products; medicines and medical appliances. The decline in consumption growth is mainly related to the rapid decline in the growth

1.2 Consumption Growth Slowed Down, and Motor Vehicles …

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Fig. 1.2 Growth rates of GDP and three major sectors: cumulative, YoY, %. Source CQMM team calculations on CEIC data 100.0 90.0

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12-2015

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03-2015

80.0

60.0 50.0 40.0 30.0 20.0 10.0

Primary industry

Secondary industry

Tertiary industry

Fig. 1.3 Contribution of the three industries to GDP growth: cumulative, %. Source CQMM team calculations on CEIC data

4

1 China’s Economic Performance in the First Half of 2018

16.00 15.00 14.00 13.00 12.00 11.00 10.00

8.00

02-2012 05-2012 08-2012 11-2012 02-2013 05-2013 08-2013 11-2013 02-2014 05-2014 08-2014 11-2014 02-2015 05-2015 08-2015 11-2015 02-2016 05-2016 08-2016 11-2016 02-2017 05-2017 08-2017 11-2017 02-2018 05-2018

9.00

Total

Urban area

Rural area

Fig. 1.4 Growth rates of total retail sales of social consumer goods: cumulative, YoY, %. Source CQMM team calculations on CEIC data

of motor vehicles consumption. In the first half of 2018, motor vehicles consumption decreased by 7% YoY, down 16.8 percentage points from the same period of the previous year (see Fig. 1.5). Subjected to changes in tariffs on July 1, the sales of motor vehicles in May and June dropped significantly. As motor vehicles consumption accounts for 28 and 13% of the total retail sales of enterprises above the designated size and the total retail sales of consumer goods, respectively, the decline in motor vehicles consumption lowered the growth of total consumption. In the first half of 2018, the total retail sales of urban consumer goods reached 15.41 trillion yuan, a nominal increase of 9.2% YoY, down 0.9 percentage points from the same period of the previous year. The total retail sales of rural consumer goods reached 2.59 trillion yuan, a nominal increase of 10.5% YoY, down 1.8 percentage points from the same period of the previous year (see Fig. 1.4). Consumption depends mainly on income. In the first half of 2018, the real disposable income of urban residents increased by 5.8% YoY, which was 1.0 percentage point lower than GDP growth rate, 0.7 percentage points lower than the same period of the previous year. The real disposable income of rural residents went up by 6.8% YoY, which was equal to GDP growth rate, down 0.6 percentage points from the same period last year. The national per capita real disposable income picked up by 6.6% YoY, 0.2 percentage points lower than the GDP growth rate by 0.2 percentage points, indicating that China’s current income distribution is not conducive to the increase of residents’ income (see Fig. 1.6).

1.2 Consumption Growth Slowed Down, and Motor Vehicles …

5

20.00 15.00 10.00

9.80 8.10

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-10.00

Automobiles

Petroleum and related products

Food, beverages, tobacco and liquor

Clothings, shoes, hats, and textiles

Household appliances and video appliance

Traditional Chinese and Western medicines

Fig. 1.5 Growth rates of total retail sales of enterprises above designated size by category of main commodities: cumulative, YoY, %. Source CQMM team calculations on CEIC data 11.00 10.00 9.00 8.00 7.00 6.00 5.00

03-2014 05-2014 07-2014 09-2014 11-2014 01-2015 03-2015 05-2015 07-2015 09-2015 11-2015 01-2016 03-2016 05-2016 07-2016 09-2016 11-2016 01-2017 03-2017 05-2017 07-2017 09-2017 11-2017 01-2018 03-2018 05-2018

4.00

National

Urban residents

Rural residents

Fig. 1.6 Growth rates of residents’ per capita real disposable income: cumulative, YoY, %. Source CQMM team calculations on CEIC data

6

1 China’s Economic Performance in the First Half of 2018

1.3 The Growth of Investment in Manufacturing Edged up, While the Growth of Infrastructure Investment Declined Significantly and that of Investment in Real Estate Development Maintained Stable In the first half of 2018, the total FAI of the whole society (excluding rural household) went up by 29.73 trillion yuan, a nominal increase of 6.0% YoY, down 2.6 percentage points from the same period of the previous year. The private FAI increased by 8.4% YoY, 1.2 percentage points higher than the same period of the previous year. The difference between the growth rate of total FAI and that of private FAI has been gradually narrowed from 5.4 percentage points in October 2016 to −0.2 percentage points in January 2018. Since February 2018, the growth rate of total FAI has been lower than that of private FAI. And the gap between them expanded from −0.2 percentage points in February to −2.4 percentage points in June (see Fig. 1.7). That the growth rate of private FAI in the first half of 2018 is higher than that of total FAI in the whole society is mainly due to the significant decline in the growth rate of investment by state-owned and state-holding enterprises and the sharp decline in the growth rate of infrastructure investment in the tertiary industry (see Fig. 1.8). The change in the growth gap of between the total and private investment in the tertiary industry shows that the problem of institutional entry barriers faced by private investment has relatively eased. Nonetheless, the growth rate of private investment in the secondary industry was still at a low level in the past decade.

12.00 10.00 8.00 6.00 4.00 2.00

01-2016 02-2016 03-2016 04-2016 05-2016 06-2016 07-2016 08-2016 09-2016 10-2016 11-2016 12-2016 01-2017 02-2017 03-2017 04-2017 05-2017 06-2017 07-2017 08-2017 09-2017 10-2017 11-2017 12-2017 01-2018 02-2018 03-2018 04-2018 05-2018 06-2018

0.00

Private investment in FAI

Total investment in FAI

Fig. 1.7 Growth rates of total and private FAI: cumulative, YoY, %. Source CQMM team calculations on CEIC data

1.3 The Growth of Investment in Manufacturing Edged up, While …

7

40.00 35.00 30.00 25.00 20.00 15.00 10.00

0.00

01-2016 02-2016 03-2016 04-2016 05-2016 06-2016 07-2016 08-2016 09-2016 10-2016 11-2016 12-2016 01-2017 02-2017 03-2017 04-2017 05-2017 06-2017 07-2017 08-2017 09-2017 10-2017 11-2017 12-2017 01-2018 02-2018 03-2018 04-2018 05-2018

5.00

Primary industry: total FAI

Secondary industry: total FAI

Tertiary: total FAI

Primary industry: private FAI

Secondary industry: private FAI

Tertiary industry: private FAI

Fig. 1.8 Growth rates of total and private FAI by industries: cumulative, YoY, %. Source CQMM team calculations on CEIC data

In the first half of 2018, manufacturing investment increased by 6.8% YoY, 1.3 percentage points higher than the same period of the previous year. Manufacturing accounted for 31.2% of the total FAI of the whole society. In recent years, although manufacturing investment still plays an important role in the total FAI of the whole society, its proportion continued to fall. As the proportion of private investment in manufacturing investment was 87.1%, the growth of private investment in manufacturing directly determines the direction of the total investment in manufacturing. Since the third quarter of 2016, due to the global economic recovery, the growth of private investment in manufacturing has reversed the previous downward trend and gradually stabilized. However, in the second half of the year, the impact of Sino-US trade disputes is expected to pull down the growth of private investment in manufacturing (see Fig. 1.9). In the first half of 2018, investment in infrastructure construction went up by 7.3% YoY, down 13.8 percentage points from the same period of the previous year. Such a sharp drop was because that, on the one hand, since 2017, holding against systemic risks has been taken as the focus of economic work of China’s central government. Regulating financing and debt-raising of local governments and cleaning up non-compliant and illegal projects has the restricted local government’s financing channels. Not only the lack of funding sources, but also the suspension and mitigation of some major projects, have slowed the growth of infrastructure investment. On the other hand, from the perspective of demand for infrastructure investment, after years of rapid development in infrastructure construction, the need to substantially increase infrastructure investment has relatively diminished.

8

1 China’s Economic Performance in the First Half of 2018

12.00 10.00 8.00 6.00 4.00

Total investment

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10-2016

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2.00

Private investment

Fig. 1.9 Growth rates of total and private investment in manufacturing: cumulative, YoY, %. Source CQMM team calculations on CEIC data

In the first half of 2018, the total investment in real estate development picked up by 7.4% YoY, an increase of 1.9 percentage points over the same period of the previous year, showing a good momentum. As to the several sub-indicators of real estate, from January to June, the growth rate of new construction area of commercial housing increased from 2.95 to 11.78%, and the land acquisition area went up from −1.23 to 7.2%, reflecting that real estate investment still maintained relatively high growth. However, affected by strict regulation and control policy on real estate, the growth rate of the sales area of commercial housing fell slightly from 4.11 to 3.32% (see Fig. 1.10). Under strict financial supervision, the growth rate of domestic loan for investment in real estate development dropped sharply to −7.9%, down 30 percentage points from the same period of the previous year. In terms of sources of funds, investment in real estate development only increased by 4.6%, down 6.6 percentage points over the same period last year. Meanwhile, the growth of the source of real estate development funds continued to decline, and the pressure on real estate enterprises increased, indicating that the good momentum of real estate investment began to weaken (see Fig. 1.11).

1.3 The Growth of Investment in Manufacturing Edged up, While …

9

50 40 30 20 10 0 -10 -20 -30

New construction area of commercial housing

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-40

Commercial housing sales area

Land purchase area

Fig. 1.10 Changes in sub-indicators of real estate: cumulative, YoY, %. Source CQMM team calculations on CEIC data 20

15

10

5

Investment in real estate development

05-2018

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05-2016

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07-2015

05-2015

03-2015

-5

01-2015

0

Sources of real estate development funds

Fig. 1.11 Investment in real estate development and sources of real estate development funds: cumulative, YoY, %. Source CQMM team calculations on CEIC data

10

1 China’s Economic Performance in the First Half of 2018

1.4 The Trade Surplus Shrunk Significantly, While the Trade Surplus with the US Kept Rising In the first half of 2018, China’s total value of merchandise exports denominated by RMB rose by 4.9% YoY, and that of merchandise imports increased by 11.5%, down by 10.1 and 14.2 percentage points respectively over the same period of the previous year. As the growth of imports continued to be stronger than that of exports, the trade surplus goods decreased from 1230.3 billion yuan in the same period last year to 889.3 billion yuan, a decrease of 27.72% (see Fig. 1.12). In the first half of 2018, China’s trade surplus with the US kept rising to 134 billion dollars, an increase of 13.2% over the same period of the previous year, accounting for 97.2% of China’s total trade surplus. There are two main reasons for this change: First, compared with other economies, the US economy has shown stronger economic momentum, resulting in higher demand for imports; Second, against the backdrop of the Sino-US trade war, some domestic enterprises increase exports in advance, which played a certain role in boosting the trade surplus. In the second half of the year, due to the impact of the Sino-US trade war, China’s trade surplus is expected to continue to decline. In the first half of 2018, the total value of China’s services imports and exports was 2.53 trillion yuan, up 8.5% YoY, higher than the growth rate of merchandise imports and exports by 0.6 percentage points, higher than the growth rate of service industry’s added value of 0.9 percentage points, higher than the GDP growth rate by 1.7 percentage points. The total value of service exports reached 8.42 trillion yuan,

40.00 30.00 20.00 10.00 0.00 -10.00 -20.00

01-2016 02-2016 03-2016 04-2016 05-2016 06-2016 07-2016 08-2016 09-2016 10-2016 11-2016 12-2016 01-2017 02-2017 03-2017 04-2017 05-2017 06-2017 07-2017 08-2017 09-2017 10-2017 11-2017 12-2017 01-2018 02-2018 03-2018 04-2018 05-2018 06-2018

-30.00

Exports

Imports

Fig. 1.12 Growth of total value of merchandise exports and imports: cumulative, YoY, %. Source CQMM team calculations on CEIC data

1.4 The Trade Surplus Shrunk Significantly, While the Trade …

11

up 13.6% YoY. The total value of services imports was 1.69 trillion yuan, up 6.1% YoY. The service trade deficit was 848.18 billion yuan, shrunk by 2.66 billion yuan compared with that of the same period last year. Service trade accounted for 15.2% of total foreign trade, an increase of 0.1 percentage points over the same period of the previous year. In the first half 2018, imports and exports of emerging services totaled 846.67 billion yuan, up 19% YoY, 10.5 percentage points higher than the growth rate of overall imports and exports. Exports of emerging services totaled 440.2 billion yuan, up 23.6% YoY, 10 percentage points higher than the growth rate of total service exports, accounting for 52.3% of total services exports, an increase of 4.2 percentage points over the same period last year. Of emerging services, the growth rates of telecommunications, computer and information services, insurance, personal culture and entertainment, maintenance and repair exports were 52.4, 37.9, 35.8, and 22.6%, respectively, all above 20%. By contrast, the shares of travel services, transport, and construction, which are three sectors of traditional services, fell by 2.5 percent points.

1.5 The CPI Remained Low and the PPI Rebounded Slightly In the first half of 2018, as to the consumer price index (CPI), except for the sharp rise and fall that occurred in January and February due to the severe cold weather and the dislocation of the Spring Festival, it remained low in the rest of the months, stabilizing between 1.8 and 2.3% (see Fig. 1.13).

2.0

3.00

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01-2016 02-2016 03-2016 04-2016 05-2016 06-2016 07-2016 08-2016 09-2016 10-2016 11-2016 12-2016 01-2017 02-2017 03-2017 04-2017 05-2017 06-2017 07-2017 08-2017 09-2017 10-2017 11-2017 12-2017 01-2018 02-2018 03-2018 04-2018 05-2018 06-2018 07-2018 08-2018

3.50

CPI: YoY

CPI MoM (RHS)

Fig. 1.13 Changes in CPI: %. Source CQMM team calculations on CEIC data

12

1 China’s Economic Performance in the First Half of 2018 2.0

10.00 8.00

1.5

6.00 1.0

4.00

0.5

2.00 0.00

0.0

-2.00 -0.5

-6.00

01-2016 02-2016 03-2016 04-2016 05-2016 06-2016 07-2016 08-2016 09-2016 10-2016 11-2016 12-2016 01-2017 02-2017 03-2017 04-2017 05-2017 06-2017 07-2017 08-2017 09-2017 10-2017 11-2017 12-2017 01-2018 02-2018 03-2018 04-2018 05-2018 06-2018

-4.00

PPI YoY

-1.0

PPI MoM (RHS)

Fig. 1.14 Changes in PPI: %. Source CQMM team calculations on CEIC data

In the first half of 2018, the producer price index (PPI) continued to decline in the first quarter, and rebounded monthly after the second quarter, but still significantly lowers than the same period last year. The main reason is that industrial prices are difficult to show upward trend due to weak demand (see Fig. 1.14).

1.6 The Grow Rate of M2 Hit a New Low, and Shrinking Non-standard Financing Suppressed Social Financing In the first half of 2018, the broad money (M2) increased by 7.97% YoY, 0.3 and 1.1 percentage points lower than the end of last year and the same period last year, respectively, setting a record low (Fig. 1.15). New social financing totaled 9.1 trillion yuan, a decrease of 2.03 trillion yuan over the same period of the previous year. Among them, new RMB loans increased by 8.76 trillion yuan, an increase of 550.34 billion yuan over the same period last year. The new RMB loans accounted for 96.3% of new social financing, a significant increase of 22.5 percentage points over the same period of the previous year. Of the new RMB loans, the proportion of loans to nonfinancial enterprises and institutional groups was 57.3%, an increase of 1.7 and 7.7 percentage points over the same period of the previous year and last year. Though the strengthening of financial supervision has alleviated the situation of credit resources deviating from the real economy to the virtual economy to a certain extent, it has also closed down other channels that can obtain funds other than domestic loans. In the first half of 2018, the total amount of new social financing increased by 9.69 trillion yuan, a decrease of 1.74 trillion yuan over the same period last year.

1.6 The Grow Rate of M2 Hit a New Low, and Shrinking Non-standard …

13

30.00 25.00 20.00 15.00 10.00 5.00 0.00

M2

M1

Fig. 1.15 Growth rates of M1and M2: YoY, %. Source CQMM team calculations on CEIC data

The main reason for the decline in total social financing is that the total amount of non-standard financing, including entrusted loans, trust loans, and undiscounted bankers’ acceptances, decreased by 3.74 trillion yuan (see Fig. 1.16). In the context of deleveraging, the main intent of China’s financial policy is to contract off-balance sheet financing by expanding on-balance sheet credit. However, from the perspective of data, the effect of credit expansion on the real economy was not significant enough. Against the sharp contraction of 3.74 trillion yuan in non-standard financing, the new credit rose by only 0.55 trillion yuan.

1.7 The Growth Rate of Fiscal Revenues Was Relatively High, and that of Land Transfer Income Continued to Rise In the first half of 2018, the general public budget revenue was 10.43 trillion yuan and picked up by 10.63% YoY, 0.35 percentage points higher than the same period of the previous year. Of the general public budget revenue, tax revenue increased by 14.43% YoY, up 3.58% over the same period of last year; non-tax revenue decreased by 10.75% YoY, down 17.93 percentage points from the same period of last year. The general public budget revenue of the central government rose by 13.67% YoY, down 4.43 percentage points from the same period last year; the local general public budget revenue of the local governments went up by 7.99% YoY, 3.71 percentage points higher than the same period of the previous year.

14

1 China’s Economic Performance in the First Half of 2018

25.00 20.00 15.00 10.00 5.00 0.00

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Fig. 1.16 Changes in new social financing and non-standard financing: cumulative, billion yuan. Source CQMM team calculations on CEIC data

The general public budget expenditure was 11.16 trillion yuan, grew by 7.84% YoY, down 8.22 percentage points from the same period of the previous year. The general public budget expenditure of the central government increased by 8.28% YoY, down 1.18 percentage points from the same period of the previous year; the general public expenditure of the local governments rose by 7.33% YoY, down 9.42 percentage points from the same period last year. In terms of sub-items, the general public budget expenditures on education, science and technology, education, science and technology, culture and sports and media, social security and employment, health and family planning, environmental protection, urban and rural community affairs, agriculture, forestry and water affairs, transportation and debt Interest payments were up 6.9, 25.4, 5.8, 11.3, 9.8, 16.3, 5.5, 3.7, 0.5 and 19%, respectively. The expenditures on agriculture, forestry and water affairs, and transportation related to infrastructure fell by 1.3 and 12.7 percentage points respectively over the same period of the previous year. Interest expense on debt related to local government debt increased by 2.5 percentage points over the same period of the previous year (see Fig. 1.17). Thanks to the active real estate market, the revenue and expenditure of government funds continued to maintain rapid growth. In the first half of the year, the revenue of government funds was 3.12 trillion yuan, a YoY increase of 36%, an increase of 8.20 percentage points over the same period of the previous year. The land transfer income totaled 2.69 trillion yuan, accounting for 86.25% of government funds revenue, up 43.03% YoY, an increase of 9.03 percentage points over the same period last year. The expenditure of government funds was 2.81 trillion yuan, increased by 37.28% YoY, up 12.68 percentage points over the same period of the previous year.

1.7 The Growth Rate of Fiscal Revenues Was Relatively High, and …

15

31.0 25.9

25.4 16.7

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2017H1

2018H1

Fig. 1.17 Changes in sub-indictors of the general public budget expenditures: cumulative, YoY, %. Source CQMM team calculations on CEIC data

In summary, in the first half of 2018, driven by the rapid growth of exports, manufacturing investment and private investment maintained an upward momentum, and consumption continued to be the main driving force for China’s economic growth. However, in the second half of the year, as the Sino-US trade war continues to escalate, the current weak situation of foreign trade may further deteriorate, which will have a negative impact on manufacturing investment, private investment and consumption. Under the current policy of preventing risks and strict supervision, both the contraction of non-standard financing channels and the unsmooth return of off-balance sheet financing have led to rapid credit shrinking. Besides, due to such factors as real estate regulation and control, and local government debt risk prevention and control, the prospect for investment in development and infrastructure construction is not optimistic. Overall, in the second half the year, the hidden worries of China’s economic downturn is gradually emerging. China’s decision makers need to adjust its monetary and fiscal policies and fine-tune the pace of regulatory policies.

Reference Huang, W.T., & Dong, M.J. (2008). Why the growth of the total sales of social consumer goods slowed while the contributions of consumption to GDP growth rose? China Securities Research Paper. China CITIC Securities.

Chapter 2

Quarterly Forecast for 2018–19

2.1 Assumptions on Exogenous Variables 2.1.1 GDP Growth of the US and the Euro Zone In the first half of 2018, although the global economic expansion momentum continued, the growth prospects of major economies begun to diverse. On the one hand, the growth of the US economy accelerated due to the active labor market, the low unemployment rate, and the tax reform boosting the strong demand. US GDP grew by 2.58 and 2.87% YoY in the first and second quarter respectively. On the other hand, the growth rates of other major economies such as Germany and France in the first half of 2018 were lower than expected. The political and economic uncertainty faced by Italy deterred the recovery process in the euro zone. The GDP growth rate of the euro zone in the first two quarters of 2018 reached 2.1 and 2.2% respectively, which have been good performance since the global financial crisis, but still slightly lower than 2017. In July 2018, the International Monetary Fund (IMF) released the report on the World Economic Outlook, predicting that the US economy is expected to grow by 2.9 and 2.7% respectively this year and next, maintaining its April forecast, while the economy of Euro zone is anticipated to grow by 2.2 and 1.9% respectively this year and next year, 0.2 and 0.1 percentage points lower than its April forecast. Although the impact of the trade disputes provoked by the Trump administration on the US economy since 2018 will take some time to reflect, taking the implementation of its large-scale tax cuts into account, The US economy is still likely to maintain a relatively high growth rate in the short term. We assume that the US economy is expected to pick up by 2.9 and 2.8% this year and next year respectively, slightly higher than the IMF forecast. Besides, with reference to the forecast of the US Congressional Budget Office, we set the corresponding quarterly growth rates (see Fig. 2.1). © Springer Nature Singapore Pte Ltd. 2019 Centre for Macroeconomic Research, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-13-6077-0_2

17

18

2 Quarterly Forecast for 2018–19

%

3.50

3.00 2.50 2.00 1.50 1.00 USGDP_C EAGDP_C

2018Q3 2.99 1.80

2018Q4 3.16 2.30

2019Q1 3.29 1.60

2019Q2 2.90 1.70

2019Q3 2.66 1.70

2019Q4 2.44 1.90

Fig. 2.1 Assumptions on GDP growth rates of the US and the Euro: seasonally adjusted, YoY. Note EAGDP_C denotes the real GDP growth rate in the euro zone; USGDP_C denotes the real GDP growth rate in the US. Source CQMM team assumptions

In addition, given the trade disputes impacting the euro zone, the risks of hard Brexit, the aggressive budget of the Italian populist government exacerbating debt risks, and so on, such factors have heightened the uncertainty of the euro zone’s economic prospects. We assume that the euro zone’s GDP grow by 2.2 and 1.7% this year and next respectively, slightly lower than the IMF forecast. Besides, with reference to the European Central Bank’s forecast, set the corresponding quarterly growth rate (see Fig. 2.1).

2.1.2 The Exchange Rates Since 2018, thanks to the improvement of the fundamentals of the US economy and the economic uncertainty in the euro zone, the exchange rate of the US dollar against the Euro has continued to go strong. It is expected that by the end of 2019, the Euro will depreciate to 1 Euro to 1.12 US dollars (see Fig. 2.2). The differences in the fundamentals of different economies are triggering the divergence of monetary policies. The Fed’s contraction of the balance sheet and the continued process of Interest rate hikes further support the strengthening of the US dollar and the tightening of financial conditions in emerging markets and the depreciation of their currencies. Against this background, the downward pressure on China’s current economy is not conducive to the central bank to follow up on raising Interest rates, and the RMB exchange rate is still facing pressure to depreciate in the short term. Therefore, we

2.1 Assumptions on Exogenous Variables

19 $/Euro

Yuan/$

1.24

6.90

1.22 6.80

1.20 1.18

6.70

1.16 6.60

1.14 1.12

6.50

1.10 1.08

6.40

1.06 6.30 usdeuro er_w

2018Q1 6.34 1.23

2018Q2 6.38 1.19

2018Q3 6.80 1.16

2018Q4 6.82 1.16

2019Q1 6.83 1.14

2019Q2 6.84 1.13

2019Q3 6.84 1.14

2019Q4 6.85 1.12

1.04

Fig. 2.2 Changes in exchange rates of the US dollar against the Euro and the RMB against the US dollar: YoY. Note The figures in 2018Q1 and 2018Q2 are actual values, and the rest are forecast values. Source CQMM team assumptions

assume that the exchange rate of the RMB against the US dollar gradually depreciate to 6.85 by the end of 2019 (see Fig. 2.2).

2.1.3 The Broad Money Supply (M2) In the first half of 2018, due to the continued deleveraging policy, the growth rate of M2 dropped to 7.97%. In the second half of the year, China’s central bank may have to accelerate the release of money thanks to the downward pressure on the economy induced by the decline in investment growth and the escalation of Sino-US the trade disputes. We assume that the growth rate of M2 slightly rise to 8.6% in 2018 and further rise to 9% in 2019 (see Fig. 2.3).

2.2 Scenarios Planning to Simulate the Impact of Sino-US Trade Disputes US President Trump signed a memorandum on March 22, 2018 and announced that the US was going to impose punitive tariffs on goods imported from China in accordance with Article 301 of the 1974 Trade Act, officially provoking the 2018 Sino-US trade war. Though China and the US once issued a joint statement seeking a settlement on May 19, but the US Trade Representative Office still released a list of additional tariffs on China on June 16. In response, China’s State Council Tariff Commission counterattacked on a reciprocal basis. As of August 23, the two

20

2 Quarterly Forecast for 2018–19

9.40

%

9.20 9.00 8.80

8.60 8.40 8.20 8.00 7.80 M2

2018Q1 8.20

2018Q2 7.97

2018Q3 8.30

2018Q4 8.60

2019Q1 8.90

2019Q2 9.20

2019Q3 9.00

2019Q4 9.00

Fig. 2.3 Assumptions on growth rates of M2: YoY. Note The figures in 2018Q1 and 2018Q2 are actual values, the rest are forecast values. Source CQMM team assumptions

sides imposed a 25% tariff on each other’s $50 billion worth of goods imported from each other. Since then, the trade disputes have continued to escalate: President Trump announced a 10% tariff on an additional $200 billion in Chinese products starting from September 24, 2018 and an increase of 25% starting from January 1, 2019. China’s State Council Tariff announced a 10 or 5% tariff on 5207 tax items originating in the US and about 60 billion US dollars of goods, and stated that it is going to follow up on the actions of the US to increase the tariff rates. In order to explore the impact of Sino-US the trade disputes on China’s economy, we considered two possible directions of the Sino-US trade disputes: The first is that, from the end of the year to next year, the trade disputes would no longer be upgraded, and both sides implement the tariff rates that have been announced. The second is that the trade disputes would further escalate, and both sides not only expand the scale of duty, but also increase the punitive tariff rates. And then, based on the CQMM, we evaluate the impacts of these two kinds of trade disputes on the Chinese economy. Specifically, two simulation scenarios are designed: Scenario 1: Both China and the US implement the scale and scope of the tariffs that have been announced. That is, the US will impose an additional duty of 25% on $50 billion of China’s exports to the US from 2018Q3, an additional duty of 10% on $200 billion from 2018Q4, and an additional duty of 25% on a total of $250 billion from 2019. Correspondingly, China will impose a reciprocal tariff on $110 billion in imports from the US from 2018Q3, an additional $60 billion from 2018Q4, and a total of $110 billion from 2019. Scenario 2: Further escalation of Sino-US trade war. That is, from 2018Q4, the US will impose an additional duty of 25% on $250 billion of Chinese exports to the

2.2 Scenarios Planning to Simulate the Impact of Sino-US Trade Disputes

21

US, and an additional duty of 25% on all Chinese exports to the US from 2019. Correspondingly, China will impose an additional duty of 25% on a total of $110 billion of imports from the US from 2018Q4, and an additional duty of 25% on all imports from the US from 2019. Under the above two scenarios, the mechanism of the Sino-US trade war affecting China’s economy is as follows: First, that the US imposes additional tariffs on goods imported from China will affect both China’s exports to the US and China’s exports to other economies arising from the trade transfer effect, which is induced by changes in the relative prices of exports. Therefore, the impact of the US tariff increase on China’s total exports needs to weigh the net effect of the above two aspects. Likewise, China’s punitive tariffs on the US have the same effects on China’s total imports. Second, since the export of private enterprises has accounted for an absolute majority of total exports, the trade war will affect their investment, and thus affect China’s GDP growth. Thirdly, changes in GDP growth will be fed back to investment, consumption and other fields, triggering further adjustments. Nevertheless, we have reason to believe that the impact of the Sino-US trade war on China’s GDP growth would be limited. First, the relative excess of export supply caused by the decline in China’s exports to the US would lower the prices of exports, prompting other economies to digest these excess supplies and bring about trade transfer effect, thereby partially offset the decline in exports to the US. Second, China is in the middle reaches in the global industrial chain, and a considerable part of its exports is processing trade. In other words, a considerable part of China’s imports is induced by China’s exports to developed economies such as Europe and the US. The reduction in exports to the US would correspondingly reduce this portion of induced imports, thereby mitigating the impact on China’s net exports and GDP. Thirdly, if the trade war led to a decline in the growth of private investment, China would have to expand the current investment by SOEs and local governments would to ensure that the growth of investment maintain basically stable. Fourthly, China’s timely and reciprocal counter-measures against the US would reduce imports from the US and offset some of the net export shocks caused by the decline in exports to the US. In a word, we believe that the negative impact of Sino-US trade war on China’s GDP growth through trade channels would be limited this year and next. The downward pressure on China’s economic growth would still come from the slowdown in the growth of investment and consumption.

2.3 Quarterly Forecast of China’s Key Macroeconomic Indicators in 2018–19 2.3.1 Projected GDP Growth Under the above assumptions on key exogenous variables in the China Quarterly Macroeconometric Model (CQMM), in Scenario 1 that both China and the US imple-

22

2 Quarterly Forecast for 2018–19 6.90

%

6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 Scenario1 Scenario2

2018Q1 6.80 6.80

2018Q2 6.70 6.70

2018Q3 6.62 6.62

2018Q4 6.46 6.23

2019Q1 6.36 6.20

2019Q2 6.46 6.35

2019Q3 6.53 6.42

2019Q4 6.56 6.70

Fig. 2.4 Projected GDP growth rates in different scenarios: YoY. Note The figures in 2018Q1 and 2018Q2 are actual values, and the rest are forecast values. Source CQMM team calculations

ment the scale and scope of the tariffs that have been announced, China’s GDP in 2018 is expected to grow by 6.64%, 0.26 percentage points lower than that of 2017, and 0.09 percentage points lower than our spring forecast. In 2019, China’s GDP growth rate is projected to further drop to 6.48%, 0.12 percentage points lower than our spring forecast. In Scenario 2 that the Sino-US trade war escalates, China’s GDP growth rate in 2018 is anticipated to drop to 6.58%, 0.32 percentage points lower than that in 2017, and 0.15 percentage points lower than our spring forecast. In 2019, China’s GDP growth rate is set to further fall to 6.42%, a decrease of 0.18 percentage points from our spring forecast. The above predictions show that although the Chinese economy has experienced a significant decline in foreign trade dependence after its transformation and development in recent years, and China’s economic growth has already had considerable resilience, the Sino-US trade war would have some negative impacts on the Chinese economy and increase the pressure on China’s economic slowdown. Quarterly, in Scenario 1, China’s GDP growth is expected to fall back to 6.62% in 2018Q3, and further decline to 6.46% in 2018Q4, making China’s GDP growth rate in 2018 show a quarterly decline. In 2019, the base effect is projected to bring China’s GDP growth to its lowest level of 6.36% in two years in the first quarter. Subsequently, China’s GDP growth rate is set to pick up quarter by quarter due to transfer effect and carryover factor, which is 6.46 6.53 and 6.56% (see Fig. 2.4). In Scenario 2, China’s GDP growth rate is forecast to be most shocked by the trade war in 2018Q4 and 2019Q1, and fall to 6.23 and 6.20%. Since then, as the trade transfer effect and the effect of inducing import weakening began to play a role, coupled with the impact of carryover factor, China’s GDP growth is projected to rebound gradually and even reach 6.70% in 2019Q4 (see Fig. 2.4).

2.3 Quarterly Forecast of China’s Key Macroeconomic Indicators in 2018–19

23

2.3.2 Projected Growth of Exports and Imports As the US is China’s largest trade partner, the trade war provoked by the US is definitely expected to affect China’s import and export growth this year and next. However, thanks to the continued growth of the global economy and the continuous upgrading of China’s industrial structure, the impact of the Sino-US trade war on China’s import and export growth would be limited. Our CQMM model predicts that, in Scenario 1, the total value of exports denominated by US dollar is projected to rise by 11.83% in 2018, an increase of 5.21 percentage points over 2017; the total value of imports is anticipated to increase by 20.00%, up 3.87 percentage points over 2017. In 2019, the total value of exports and imports is set to grow by 5.96 and 10.70%, respectively, lower than those in 2018. In Scenario 2, the total value of exports is anticipated to pick up by 11.48% in 2018, and the total value of imports is forecast to go up by 19.86%, slightly lower than those in Scenario 1. In 2019, the total value of exports and imports is set to expand by 5.05 and 9.89%, respectively. The impacts of the trade war are expected to be more significant than those in Scenario 1 (see Table 2.1). By trade partner, China’s exports to the US bear the brunt. In Scenario 1, the total value of exports to the US is expected to grow by 4.77% in 2018, down 6.47 percentage points over 2017. In 2019, it is projected to turn negative, with a growth rate of −17.98%. In contrast, China’s exports to the EU, ASEAN, and other trade partners are set to improve due to global economic expansion and trade transfer effects. In 2018, the total value of exports EU, ASEAN, and other trade partners is expected to increase by 12.32, 15.98 and 13.11%, respectively, up 3.36, 9.18 and 8.83 percentage points compared with 2017. In 2019, it is forecast to grow by 8.96, 19.29 and 9.97%, respectively. Meanwhile, the growth of China’s imports from the US are projected to slow down due to China’s reciprocal counter-measures and the reduction in imports induced by the deceleration of China’s exports to the US. Imports from ASEAN and other trade partners are set to grow alternately thanks to trade transfer effects. As a result, China’s overall growth of exports and imports is anticipated to remain relatively stable. In 2018, the growth rate of China’s imports from the US is expected to fall to 6.82%, down 8.39 percentage points over 2017 and further drop to 4.45% in 2019. By contrast, the growth rate of imports from the EU, ASEAN and other trade partners is forecast to rise to 14.67, 19.53, and 22.96% respectively in 2018, and the changes are 2.98, −1.20, and 7.87 percentage points, respectively, compared with 2017. In 2019, the growth rate is projected to be 12.50, 6.82, and 11.70%, respectively. In Scenario 2, each growth rate of exports and imports is expected to change in the same direction, but the magnitude of changes is more significant (see Table 2.1). Affected by the Sino-US trade war, in Scenario 1, the share of China’s net exports to GDP in 2018 is expected to fall to 0.05%, down 1.04 percentage points from 2017. In 2019, it is forecast to fall further to −0.92%. In Scenario 2, the proportion of net exports to GDP is 0.00 and −0.95% in the next two years. In addition, although the exchange rate of the RMB against the US dollar is expected to depreciate overall

8.96

19.29

9.97

EU

ASEAN

Others

10.00

19.25

10.77

5.05 −25.57

5.96

−17.98

13.12

15.97

12.84

2.43

11.48

US

13.11

Others

Total

12.32

15.98

ASEAN

4.77

EU

11.83

US

14.13

23.82

13.07

−14.66

10.02

10.37

13.20

9.63

1.99

9.08

14.16

23.79

14.93

−22.49

9.08

10.38

13.19

11.70

6.82

12.50

4.45

10.70

22.96

19.53

14.67

6.82

10.16

20.00

8.72 −0.36

Scenario 1

11.64

4.73

12.44

−2.32

9.89

22.90

19.47

14.60

5.83

19.86

Scenario 2

Scenario 1

Scenario 2

Scenario 1

Current price/US dollars Scenario 2

Imports Current price/US dollars

Current price/RMB

Exports

Total

Source CQMM team calculations

2019

2018

Trade partners

Table 2.1 Projected growth of China’s exports and imports in 2018–19 by trade partner: %

15.91

10.84

16.68

8.61

14.88

20.01

16.73

12.03

4.02

17.13

Scenario 1

15.85

8.67

16.63

1.60

14.04

19.95

16.66

11.97

3.03

16.99

Scenario 2

Current price/RMB

24 2 Quarterly Forecast for 2018–19

2.3 Quarterly Forecast of China’s Key Macroeconomic Indicators in 2018–19

25

Billion/$

3200

3150

3100

3050

3000

2950 Scenario1 Scenario2

2018Q1 3161 3161

2018Q2 3091 3091

2018Q3 3092 3092

2018Q4 3071 3053

2019Q1 3051 3037

2019Q2 3049 3039

2019Q3 3036 3027

2019Q4 3007 2999

Fig. 2.5 Projected foreign exchange reserves. Note The figures in 2018Q1 and 2018Q2 are actual values, and the rest are forecast values. Source CQMM team calculations

this year and next and the trade war has narrowed the surplus, the decline in the sharp depreciation expectation and the confidence established by the central bank’s successful foreign exchange management operations over the past two years will ease capital outflow pressure, maintaining the scale of foreign exchange reserves relatively stable. China’s foreign exchange reserves are expected to decrease slightly from the middle of 2018 to $3.07 trillion at end of 2018; and further reduce to $3.01 trillion at the end of 2019 (see Fig. 2.5). The trend in the escalation scenario of the trade war is similar, but China’s foreign exchange reserves are set to fall below 3 trillion at the end of 2019.

2.3.3 Projected Growth of Investment Due to the strict financial supervision, de-leveraging policy and the control of local government debt risk, the growth of investment by SOEs and infrastructure investment declined significantly in the first half of 2018. Coupled with the negative impact of the trade war on private investment, the growth of the FAI is expected to continue to drop this year and next. The growth rate of FAI (excluding farmers) at current prices is projected to be 5.61% in 2018, down 1.59 percentage points that of 2017, and further decline to 4.45% in 2019. Quarterly, the growth rate of FAI is set to be 7.1% in 2018Q3, the highest in the next six quarters, down to 2.82% in 2018Q4. It is anticipated to rebound after 2019Q3, eventually stabilizing at around 5%.

26

2 Quarterly Forecast for 2018–19

8.00

%

7.00 6.00 5.00 4.00 3.00 2.00 1.00 Scenario1 Scenario2

2018Q1 7.50 7.50

2018Q2 5.29 5.29

2018Q3 7.10 7.10

2018Q4 2.82 2.37

2019Q1 2.42 2.01

2019Q2 5.64 5.22

2019Q3 4.63 4.21

2019Q4 5.14 5.19

Fig. 2.6 Projected growth rates of FAI: YoY. Note The figures in 2018Q1 and 2018Q2 are actual values, the rest are forecast values. Source CQMM team calculations

In Scenario 2, the growth rates of FAI (excluding farmer) at current prices are forecast to be 5.49 and 4.15% this year and next, respectively, further decline compared with Scenario 1, and lower quarterly growth rates (see Fig. 2.6). By ownership, the growth of investment by SOEs in 2018 is expected to continue the downward trend in the first half of the year. It is forecast to increase by 0.24% in 2018Q3, 0.36% in 2018Q4, and 2.06% in the whole year of 2018. In 2019Q1, it is set to reach the lowest point of 0.03% thanks to the base effect. Since then, due to the combination of stabilizing GDP growth policy and the carryover effect, it is set to rebound all the way to reach 5.93% in 2019Q4. And it is anticipated to reach 3.70% in the whole year of 2019. Meanwhile, the growth rate of private is expected to fall from 9.95% in 2018Q3 to 6.63% in 2018Q4, and reach 8.14% for the whole year of 2018. And then further decrease. It is set to remain between 4.03 and 5.52% in the four quarters of 2019. And it is anticipated to reach 4.62% in the whole year of 2019 (see Table 2.2). In summary, the trade war may become a key factor for the reversal of the growth trend of investment by different ownership. In the coming period, the growth of investment by SOEs may be forced to increase and the rebound momentum of private investment may be curbed. The predictions in our spring forecast that the investment growth rate would maintain a steady decline this year and next year have not changed, but the range has been lowered.

2.4 Projected Growth of Other Key Macroeconomic Indicators

27

Table 2.2 Projected growth rates of investment measured at current prices in 2018–19: % TI_C_SA

FAI_SA

FAI_SOE_SA

FAI_PRI_SA

Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario 1 2 1 2 1 2 1 2 2018

4.73

4.72

5.61

5.49

2.06

2.06

8.14

7.95

Q3

4.14

4.14

7.10

7.10

0.24

0.24

9.95

9.95

Q4

4.08

4.04

2.82

2.37

0.36

0.36

6.63

5.90

2019

1.48

1.39

4.45

4.15

3.70

3.74

4.62

4.12

Q1

0.58

0.51

2.42

2.01

0.00

0.06

4.03

3.33

Q2

1.94

1.84

5.64

5.22

3.80

3.84

5.53

4.83

Q3

1.77

1.65

4.63

4.21

5.29

5.32

4.23

3.55

Q4

1.66

1.56

5.14

5.19

5.94

5.97

4.68

4.75

Note TI_C denotes the FAI completed, FAI_SA denotes FAI: seasonally adjusted; FAI_SOE_SA denotes FAI by SOEs: seasonally adjusted; and FAI_PRI_SA is the part of FAI not belong to SOEs: seasonally adjusted. Source CQMM team calculations

2.4 Projected Growth of Other Key Macroeconomic Indicators As the difference between the predicted values of the following indicators in Scenario 1 and Scenario 2 is not obvious, for the sake of conciseness, only the predicted values in Scenario 1 are given.

2.4.1 Projected Growth of Key Price Indicators The CQMM predicts that inflation in China is expected to be mild this year and next. In 2018, the CPI is forecast to increase by 2.09%, up 0.49 percentage points over 2017. In 2019, the relatively loose monetary policy is set to boost the CPI up by 2.50%. Quarterly, the CPI is anticipated to rise by 2.18 and 2.17% in 2018Q3 and 2018Q4, respectively, showing relatively steady changes. In 2019, it is expected to show upward trend and in the first to fourth quarters go up by 2.13, 2.57, 2.62 and 2.66%, respectively (see Fig. 2.7). In the second half of 2018, the PPI is expected to suspend its expansion and turn to narrowing, though the overall level is anticipated to be significantly improved compared with 2017. In 2018, the PPI is projected to increase by 3.09%, down 3.21 percentage points over 2017. In 2019, the increase of the PPI is set to further fall to 1.16%. Quarterly, the growth of PPI in 2018Q3 is expected to fall back to 3.10%, and further decline to 1.54% in 2018Q4. In 2019, it is anticipated to rise gradually and in the four quarters pick up by 0.52, 1.12, 1.46 and 1.54%, respectively (see Fig. 2.7). After eliminating the base effect, the PPI stayed relatively stable.

28

2 Quarterly Forecast for 2018–19

4.50

%

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 CPI_SA P_P_SA PGDP_SA

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2.17 1.84 2.18 2.17 2.13 2.57 2.62 2.66 3.70 4.06 3.10 1.54 0.52 1.12 1.46 1.54 3.08 2.95 2.73 2.10 2.03 2.49 2.64 2.74

Fig. 2.7 Projected growth of price indices: seasonally adjusted, YoY. Note CPI_SA, PGDP_SA, and PPI_SA denotes seasonally adjusted CPI, GDP deflators, and PPI, respectively. Source CQMM team calculations

In 2018, the GDP deflator (PGDP) is expected to increase by 2.71% and in 2019 slow slightly to 2.47%. Quarterly, the overall upward trend is anticipated to be similar to other price indices. It is forecast to gradually slow down to 2.1% in 2018Q3 and 2018Q4, and expand quarter by quarter in 2019, reaching a peak of 2.74% in 2019Q4 (see Fig. 2.7).

2.4.2 Projected Growth of Residents’ Income and Consumption This year and next, the slowdown in China’s labor productivity growth will continue to curb the growth of real income of residents. The CQMM predicts that the per capita disposable income of urban residents is expected to increase by 5.73% in 2018, down 0.77 percentage points compared with 2017. In 2019, it is set to rebound to 6.06%. The per capita cash income of rural residents in 2018 is projected to rise by 9.21%, 0.75 percentage points lower than that of 2017; and further slow to climb by 8.18% in 2019 (see Fig. 2.8). That the continued decline in the growth of residents’ income and the rapidly increasing household debt ratio in the past two years has begun to curb household consumption growth and increase the difficulty of stabilizing China’s economic growth. The CQMM predicts that the total retail sales of social consumer goods

2.4 Projected Growth of Other Key Macroeconomic Indicators

11.00

29

%

10.00 9.00 8.00 7.00 6.00 5.00 4.00

2018Q1 5.73 10.36

YD_U_C_PC YC_R_C_PC

2018Q2 5.77 9.70

2018Q3 5.65 8.48

2018Q4 5.76 8.42

2019Q1 6.17 7.54

2019Q2 6.08 7.94

2019Q3 6.02 8.47

2019Q4 5.98 8.74

Fig. 2.8 Projected growth rates of income of urban and rural residents: YoY. Note YD_U_C_PC denotes per capita real disposable income of urban residents, YC_R_C_PC denotes per capita cash income of rural residents. The figures in 2018Q1 and 2018Q2 are actual values, and the rest are forecast values. Source CQMM team calculations 11.00

%

10.00 9.00 8.00 7.00 6.00 5.00 RETAIL_SA CON_D_C_SA

2018Q1 9.80 6.93

2018Q2 9.00 10.56

2018Q3 8.89 7.29

2018Q4 9.62 6.16

2019Q1 9.86 9.23

2019Q2 9.92 6.56

2019Q3 9.68 6.43

2019Q4 9.53 7.79

Fig. 2.9 Projected growth rates of consumption: YoY. Note CON_D_C_SA denotes growth rates of total household consumption measured at constant prices; RETAIL_SA denotes growth rates of the total sales of social consumer goods measured at current prices. Source CQMM team calculations

measured at current prices are projected to grow by 9.34% in 2018, down 0.96 percentage points over 2017 and rebound to go up by 9.74% in 2019, still lower than that of 2017. By contrast, household consumption measured at constant prices is set to grow by 7.71% in 2018, an increase of 0.48 percentage points from 2017 and further expand to pick up by 7.48% in 2019, still higher than that of 2017 (see Fig. 2.9). The difference between the growth rate of household consumption and that of the social retail sales of consumer goods is likely due to the residents’ service consumption.

30

2 Quarterly Forecast for 2018–19

In summary, the forecast based on the CQMM shows that the downward pressure on the Chinese economy still comes from the slowdown in the growth of investment and consumption. In the scenario that China’s government takes reciprocal countermeasures, the negative effect of the Sino-US trade war on China’s economic growth is limited, but will add to the downward pressure on the Chinese economy. 1. China’s real GDP is expected to grow by 6.64% in 2018, 0.26 percentage points lower than that of 2017. The CPI is forecast to rise by 1.96%, an increase of 0.4 percentage points over 2017. The PPI is projected to increase by 2.92%, down 3.39 percentage points over 2017. 2. Investment growth is anticipated to slow down. The Sino-US trade war is likely to curb the rebound of private investment growth. To stabilize investment, the growth of investment by SOEs is set to turn from low to high again. Measured at current prices, the total FAI (excluding farmers) is expected to increase by 5.61% in 2018, 1.59 percentage points lower than that of 2017. 3. Both the growth of urban residents’ real income and that of rural residents’ real income is expected to decelerate, and the growth of household consumption tends to decline in a steady way, while the growth of service consumption is set to accelerate. Measured at current prices, the total retail sales of consumer goods in 2018 is forecast to increase by 9.34%, down 0.96 percentage points from 2017. Household consumption is expected to grow by 7.71% in 2018, up 0.48 percentage points over 2017. 4. Thanks to the continued growth of the global economy and the continuous upgrading of China’s industrial structure, the impact of the Sino-US trade war on China’s exports and imports is still limited. In 2018, the value of total exports denominated by current US dollar is projected to expand by 11.80%, up 5.18 percentage points compared with 2017. The value of total imports is anticipated to climb by 20.00%, up 3.87 percentage points over 2017. The proportion of net exports to GDP is set to drop to 0.05%, down 1.04 percentage points from 2017.

Chapter 3

Policy Simulation: Effects of Changes in the Household Debt Ratio on China’s GDP Growth

Since the second half of 2016, in order to prevent systemic financial risks and ensure China’s steady economic growth, China has implemented various macroeconomic policies, such as “tight credit”, “strong supervision” and “tight currency”, to suppress the rising debt rates of financial institutions, local governments and non-financial enterprises. Nonetheless, since 2018, the trade disputes provoked by the US government have not only disrupted the recovery process of the global trade, but hindered the rapid growth of China’s foreign trade. As of August 2018, China’s total value of imports and exports (denominated in RMB) grew by 9.1% YoY, a significant decrease of 8.0 percentage points from the same period last year. Of these, the value of exports only rose by 5.4%, down 7.6 percentage points from the same period of the previous year; the value of imports increased by 13.7%, down 8.8 percentage points from the same period of the previous year. Furthermore, while China has tried hard to ease the debt leverage of enterprises, the household debt ratio of residents has continued to rise instead. According to the Bank for International Settlements (BIS), from 2014Q1 through 2018Q1, the debt-to-GDP ratio of China’s non-financial enterprises first increased from 144.6% by the end of 2014Q1 to 166.9% by the end of 2016Q2. And then dropped to 160.3% by the end of 2017Q4 due to de-leveraging policy, down by 6.6 percentage points. During the same period, the household debt-to-GDP ratio rose rapidly from 34.0 to 49.3%, an increase of 15.3 percentage points; the government debt-to-GDP increased from 38.0 to 47.8%, up by 9.8 percentage points (see Fig. 3.1). As a result, China’s overall debt-to-ratio has not been reduced, but increased. By the end of 2018Q1, China’s overall debt-to-GDP rose to 261.2%, setting a new high. In addition, against the continuously increasing household debt-to-GDP ratio, the growth rate of total retail sales of social consumer goods in the first half of 2108 dropped markedly, which once triggered a controversy over whether there is a consumption downgrading in China.

© Springer Nature Singapore Pte Ltd. 2019 Centre for Macroeconomic Research, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-13-6077-0_3

31

32

3 Policy Simulation: Effects of Changes in the Household Debt …

300

%

250 200 150 144.6 147.5 147.9 149.9 153.5 155.6 158.2

162.7 166.3 166.9

166.3 166.4 165.5 163.5 162.4 160.3

164.1

100 48.0 48.4 49.3 38.2 38.8 40.0 41.7 43.3 44.4 45.6 46.9 50 34.0 34.8 35.3 35.7 36.4 37.3 38.0 38.7 39.4 40.2 40.6 40.9 41.3 41.7 42.6 43.4 44.1 44.5 45.2 45.9 46.5 47.0 47.8 2018Q1

2017Q4

2017Q3

2017Q2

2017Q1

2016Q4

2016Q3

Debt-to-GDP ratio of Non-financial corporations Debt-to-GDP ratio of General government

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

2014Q3

2014Q2

2014Q1

0

Debt-to-GDP ratio of household sector

Fig. 3.1 Changes in debt-to-GDP ratios of different sectors in China since 2014. Source CQMM team calculations on the BIS data

Since 2018, although the uncertainty of the external economy has been heightened, the downward pressure on the Chinese economy has mainly come from domestic demand: First, the growth of FAI has slowed. In the first half of 2018, the FAI increased by 6.0% YoY, a significant drop of 2.6 percentage points from the same period last year. Of these, the investment in infrastructure construction dropped sharply to 7.3%, down 13.8 percentage points from the same period of the previous year; the growth rate of manufacturing investment and private investment rebounded slowly to 5.5 and 8.4% respectively, with a slight increase of 1.3 and 1.2 percentage points over the same period of the previous year. The investment in real estate grew by 9.7%, up 1.2 percentage points over the same period last year. Second, the slowdown in the growth of household real income and the rapid increase in household debt-to-GDP ratio have curbed consumption growth. In the first half of 2018, the real disposable income of residents only increased by 6.6%, 0.7 percentage points lower than the same period of the previous year. Meanwhile, affected by the rapid increase in household debt ratio due to the increasing housing loans, the total retail sales of social consumer goods fell by nearly 1.0 percentage point compared with the same period last year. Therefore, for the Chinese economy this year and next, in addition to actively copying with the external pressure challenges brought about by the Sino-US the trade disputes, China should focus on how to reduce the household debt leverage to stimulate consumption and investment, promote domestic demand, and reverse the excessive dependence of economic growth on investment.

3 Policy Simulation: Effects of Changes in the Household Debt …

33

The mechanism of effects of changes in the household debt ratio on the economy is complicated. Reducing the household debt ratio may not necessarily promote economic growth. To make the final judgment, it is necessary to measure both the positive effects and negative effects on the economy. To this end, our research team will apply the CQMM to conduct counterfactual simulation analysis of the macroeconomic effects of changes in the household debt ratio.

3.1 Changes in the Household Debt Ratio Since China launched the four trillion government investment plan in response to the global financial crisis at the end of 2008, China’s overall debt-to-GDP ratio has begun to rise rapidly, putting the current financial system at risk. Taking the credit-to-GDP gap, an early warning indicator of the underlying financial crisis, as an example, the credit-to-GDP gap of private non-financial sectors (including nonfinancial companies and residents) between China and the US changed dramatically around 2009. From 2000 through 2009, it mostly stayed below the 10% warning line in China, while in the US it basically showed an upward trend and exceeded 10% in 2006Q4, and it did not start to fall until the 2018 global financial crisis. Since 2009, it has rapidly increased from the previous negative value and exceeded 10% in China. Although there has been a brief correction from 2010Q3 and 2011Q3, its growth accelerated and it soared to a high of 29.0% in 2016Q1. Since then, with the implementation of the “tight credit” monetary policy, it has continued to fall, but still remains above 10%. And it was approximately 14.9% in 2018Q1. In contrast, the credit-to-GDP-gap of the private non-financial sector in the US has remained largely negative since 2009. In 2018Q1, it was approximately −7.6%. The situation in the euro zone is similar. Since 2009, it has also shown a downward trend and stayed negative for a long time (see Fig. 3.2). Therefore, it can be seen that since the global financial crisis, the advanced economies such as the US and the euro zone have been de-leveraging, while China has been adding leverage. As far as the current situation is concerned, although China has made some initial achievements in preventing financial risks, the overall risk of the financial system still exists and needs to be treated with caution. It is noteworthy that while China’s overall debt has risen markedly, the total household debt has also expanded rapidly. As of 2018Q1, China’s household debt reached 41.71 trillion yuan, and the household debt-to-GDP ratio was 49.3%, an increase of 30.4 percentage points from 18.9% in 2009Q1, with an average annual growth rate of 11.2% (see Fig. 3.3). As a result, the proportion of household debt to total debt has also increased significantly. As of 2018Q2, in terms of the RMB loans from financial institutions, the household loans accounted for about 34.2% of the overall loans, up 16.6 percentage points from 2007Q1, indicating that more than one-third of the overall loans from financial institutions has flew to the households (see Fig. 3.4). Therefore, the changes in the demand for the household loans have an

34

3 Policy Simulation: Effects of Changes in the Household Debt …

40

%

30 20 10

2018Q1

2016Q3

2017Q2

2015Q1

2015Q4

2014Q2

2013Q3

2012Q4

2012Q1

2011Q2

2009Q4

2010Q3

2009Q1

2008Q2

2007Q3

2006Q4

2005Q2

2006Q1

2004Q3

2003Q4

2003Q1

2002Q2

2000Q4

2001Q3

-10

2000Q1

0

-20 -30 -40 China

Japan

USA

Euro area

Fig. 3.2 Credit-to-GDP-gap ratios of private non-financial sectors in different economies. Source CQMM team calculations on the BIS data

increasing impact on the overall demand of the funds market, and will directly affect the changes in the price of funds. China’s household debt-to-GDP ratio has exceeded the average household debt ratio of emerging economies since 2011, and the gap between them has been gradually widened, while the gap between China and advanced economies has shrunk significantly (see Fig. 3.5). By the end of 2008Q1, the average household debt ratio in developed economies was 83.2%, which was about 64.4% higher than that in China. By the end of 2018Q1, the average household debt ratio in advanced economies fell to 75.2%, down 8.0 percentage points. The gap between them has narrowed to 25.9 percentage points, a dramatic drop of 38.5 percentage points. In summary, in the past few years, China’s household debt ratio has risen sharply and the size of debt has accumulated rapidly. As a result, the effects of China’s de-leveraging policies have been offset and there has been no significant decline in the overall leverage. Furthermore, the behavior of household consumption and investment has been made unstable, heightening the uncertainty of China’s economic operations.

3.1 Changes in the Household Debt Ratio

35

% 60

%

40 49.3

50

35 30 25

40

20 15

30

10 20

5 18.4

0

10

-5 -10

0 2018Q1

2017Q3

2017Q1

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2015Q3

2015Q1

BIS

2014Q3

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2011Q3

2011Q1

2010Q3

2010Q1

2009Q3

2009Q1

2008Q3

2008Q1

2007Q3

2007Q1

CEIC

Growth rate

Fig. 3.3 China’s household debt-to-GDP ratio and its growth rates with different statistical calibers. Note The household debt-to-GDP ratio from the CEIC is measured by the ratio of the total annual household loans from financial institutions to GDP, and thus it is annual data. Whereas the data from the BIS is quarterly, and its raw data is also the total amount of household loans from financial institutions. Therefore, the data in the four quarters of the calendar year after processing is approximately equal to the annual value calculated based on the CEIC data. Source CQMM team calculations on the BIS data and the CEIC data 45

%

34.16 30

15 17.60

0 2018Q1

2017Q3

2017Q1

2016Q3

2016Q1

2015Q3

2015Q1

2014Q3

2014Q1

2013Q3

2013Q1

2012Q3

2012Q1

2011Q1

2011Q3

2010Q3

2010Q1

2009Q3

2009Q1

2008Q1

2008Q3

2007Q3

2007Q1

Fig. 3.4 Changes in the share of household loans to loans from financial institutions. Source CQMM team calculations on the CEIC data

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3 Policy Simulation: Effects of Changes in the Household Debt …

100

%

80 60 40 20 0 2017Q3

2018Q1

2017Q1

2016Q3

2016Q1

2015Q3

2015Q1

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2013Q3

2014Q1

2013Q1

2012Q3

2012Q1

2011Q3

2011Q1

2010Q3

2010Q1

2009Q3

2009Q1

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2008Q1

Emerging markets Advanced economies

All reporting countries China

Fig. 3.5 The household debt-to-GDP ratio in different economies. Source CQMM team calculations on the BIS data

3.2 The Transmission Path of the Household Debt Ratio Affecting Macroeconomic Operation In order to simulate and analyze the impact of changes in the household debt ratio on China’s macro-economy, it is necessary to clarify the transmission path of its effects on economic variables. Changes in the household debt ratio of residents will affect both household loans and household deposits. On the one hand, changes in the household deposits will change the price of funds, i.e. Interest rate, by changes in funds demand, and thus change the investment demand of enterprises with various ownerships. This is defined as “investment channel”. On the other hand, changes in the household ratio will directly affect both household consumption and household deposits, this is defined as “consumption channel”. And when changes in the household debt ratio affects household deposits, the loan-to-deposit of the funds market will change the price of funds, which in turn will affect investment. Under the basic framework of CQMM, we introduce the above-mentioned transmission paths in the following ways: firstly, assume that the change in the household debt ratio is exogenous; secondly, establish the mechanism of effects of changes in the household debt ratio on the household loan and deposit. In terms of loans, construct a behavioral equation in which household loans are determined by both the household debt ratio and GDP. In terms of deposits, the household debt ratio determines the household consumption, and then determines the household deposits. Thirdly, define the household loan-to-deposit ratio (HH ratio) as the ratio of household loans (HHloan) to household savings (HHsave). Take the household loan-to-deposit and

3.2 The Transmission Path of the Household Debt Ratio Affecting …

Investment by

Base interest

SOEs

rate

Weighted

37

Exogenous variables

interest Identity equation Private investment

Household Investment channel

loan-to-deposit ratio

Endogenous

GDP

variables Household Exogenous variables

loans Household debt Household

Urban residents’ per capita

Rural

deposits Decompose

income equation Decompose

Urban residents’ per capita consumption equation Gap between per capita Link

Urban

income and per capita

consumption

Rural residents’ per capita income equation Rural residents’ per capita consumption

Urban

Explain Household debt ratio Consumption channel

Fig. 3.6 Transmission mechanism of changes in the household debt ratio. Note The variable pointed to by the arrow represents the explanatory variable; the “arrow” of the dotted line indicates the conduction path of the consumption channel. Source CQMM team design

one-year benchmark RMB loan rates (rl) as explanatory variables to regress the weighted Interest rate (eq_rl_w) of the money market, with which making the determination of the Interest rate of the money market endogenous. The interaction between variables of two transmission channels is showed by Fig. 3.7. Assume there is a decline in the household debt ratio. On the one hand, the decline in the household debt ratio may reduce the household loans and decrease the household loan-to-deposit ratio, resulting in a decline in the market weighted Interest rate, thereby stimulating the growth investment. On the other hand, the decline in the household debt ratio may weaken the household precautionary savings motives, resulting in an increase of household consumption, and thus reduce household savings and crowd out household deposits, thereby increase the household loan-to-deposit ratio, push up the market weighted interest rate, and curb investment demand. Therefore, to capture the growth effects of the decline in the household debt ratio, it is necessary to comprehensively measure various effects of the two transmission paths, and thus require establishing a refined quantitative model for research (Fig. 3.6).

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3 Policy Simulation: Effects of Changes in the Household Debt …

As to the specific setting of the model, the following points need to be mentioned: (a) China’s current household loans account for over one-third of the total loans. Meanwhile, the proportion of household deposits to financial institutions’ RMB deposits was 33.3% in 2017, which also accounted for one-third of the total. Therefore, the change in household deposits and loans is one of the important determinants of the price of funds in the money market. (b) In order to capture the features of China’s current economy, the household deposits are divided into two parts: one is urban resident deposits, and the other is rural resident deposits. Besides, the savings deposit is defined by the urban (rural) population multiplying the difference between the per capita disposable income of urban (rural) residents and the per capita consumption expenditure of urban (rural) residents; (c) China’s current household loans are mainly concentrated in urban areas. Therefore, the change in the household debt ratio has a relatively larger impact on the consumption behavior of urban residents than that of rural residents. Therefore, in the consumption channel, only the household debt ratio is introduced into the consumption equation of urban residents. (d) Since changes in household consumption may also affect household deposits, and then the price of funds, the consumption channel may eventually affect the investment channel.

3.3 Scenario Simulation and Result Analysis Based on the above analysis, we apply the CQMM to simulate the macroeconomic effects of reducing the household debt ratio. The following counterfactual scenario is set: Assume that the household debt ratio both in 2016 and 2017 maintained at the level of 2015Q4, say, 38.8%, meaning that the household debt ratio in 2016 and 2017 would be 8.0 and 18 percentage points, respectively, lower than the actual values. The rationale for setting the above simulation scenario is that the recent expansion of residential housing loans is a main driving force of the increasing household debt. At the end of 2015, in order to stimulate the real estate market, China’s local governments introduced various policies to encourage residents to purchase houses, such as reducing the proportion of down payment for housing purchases, increasing the amount of provident fund loans, lowering the Interest rate of provident fund loans, and relaxing the restrictions on household purchases. At the same time, the banking sector also actively reduced the Interest rate of home purchase loans. These measures strongly supported the residents’ demand for home purchase in 2016 and 2017, resulting in a sharp increase in demand for household loans. Imagine that if the issue of controlling the excessive growth of the household debt ratio was considered at that time, the introduction of these policies would have been greatly reduced, and thus the rapid rise of the household debt ratio would be avoided.

3.3 Scenario Simulation and Result Analysis 9 % 8.62

8.64

39

8.80

8 7.60 7.23

7.22

7

6

5 2016

2017 Actual

Baseline

Senario

Fig. 3.7 Changes in the growth rate of household consumption. Note “Actual” denotes the actual value, “Baseline” denotes the baseline simulated value, and Scenario denotes the scenario simulated value. Source CQMM team calculations

The simulation results based on the CQMM display as follows: First, the decline in the household debt ratio would lead to a significant increase of household consumption. In 2016, the household consumption in the scenario simulation would grow by about 8.80%, 0.16 and 0.18 percentage points higher than the baseline simulated value and the actual value respectively. In 2017, the growth of household consumption in the scenario simulation would increase by 7.60%, 0.38 and 0.37 percentage points higher than the baseline simulated value and the actual value respectively (see Fig. 3.7). As a result, in 2016 and 2017, the growth rates of total retail sales of social consumer goods in the scenario simulation would be 0.16 and 0.38 percentage points higher than the baseline simulated value respectively. Second, the decline in the household debt ratio would slow the growth of FAI. In 2016, the growth rate of FAI in the scenario simulation would be 8.69%, 0.56 percentage points lower than the baseline simulated value. In 2017, the growth rate of FAI in scenario simulation would fall to 5.00%, 0.15 percentage points lower than the baseline simulated value. The main reason is that the decline in the household debt ratio would lead to a sharp decline in the growth of Private FAI. In 2016 and 2017, the growth rate of private FAI would be 1.01 and 1.00 percentage points lower than the baseline simulated value respectively, while that of the FAI by the SOEs would be 0.28 and 0.27 percentage points lower than the baseline simulated value respectively. Therefore, it can be seen that if the household debt ratio decreased, the household consumption would pick up. Subsequently, the household savings deposits would fall, and the market weighted Interest rate would rise, so the effect of the restraining

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3 Policy Simulation: Effects of Changes in the Household Debt …

Table 3.1 Growth rates of FAI: % Variables

2016 Actual

2017 Baseline Scenario Gap

Actual

Baseline Scenario Gap

FAI_SA

8.30

9.25

8.69

−0.56

7.34

5.51

5.00

−0.51

FAI_PRI_SA

2.72

3.65

2.64

−1.01

5.54

4.53

3.52

−1.00

FAI_SOE_SA 18.94

19.79

20.07

0.28

10.29

6.63

6.90

0.27

Note FAI_SA denotes seasonally adjusted FAI, FAI_PRI_SA denotes seasonally adjusted private FAI, FAI_SOE_SA denotes seasonally adjusted FAI of SOEs, Gap denotes the difference between the scenario simulated value and the baseline simulated value. Source CQMM team calculations 7

%

6.28

6.38

6.26

6

5 4.56

4.49 4.26

4

3 2016

2017 Actual

Baseline

Senario

Fig. 3.8 Changes in the growth rates of total capital formation: YoY. Source CQMM team calculations

investment growth would be stronger. In other words, the consumption channel effect of the household debt ratio would be stronger than the investment channel effect, so the total effect is that the reduction in the household debt ratio would stimulate household consumption. In addition, compared with the SOEs, Private FAI would be more dependent on changes in household deposits (Table 3.1). Third, the decline in the household debt ratio would slow the growth of total capital formation. In 2016 and 2017, the growth rate of total capital formation in scenario simulations would be 0.12 and 0.23 percentage points lower than the baseline simulated value respectively (see Fig. 3.8). In addition, the growth of net exports would also expand rapidly. In 2016 and 2017, the growth rates of net exports would be 0.73 and 2.02 percentage points higher than the baseline simulated value respectively. Finally, taking all the above-mentioned effects into account, the decline in the household debt ratio would accelerate China’s GDP growth slightly. In 2016 and 2017,

3.3 Scenario Simulation and Result Analysis 8

41

%

7 6.73

6.69

6.85

6.70

6.42

6.48

6

5 2016

2017 Actual

Baseline

Senario

Fig. 3.9 Changes in the GDP growth rates: YoY. Source CQMM team calculations

China’s GDP growth rates would be 0.01 and 0.06 percentage points higher than the baseline simulated value respectively (see Fig. 3.9). Overall, the reduction in the household debt ratio would be helpful to accelerate China’s economic growth. In summary, based on the CQMM, our research team believes that reducing the household debt ratio may achieve the following results: First, reducing the household debt ratio will help stimulate the household consumption and increase the total retail sales of consumer goods, which means that in order to expand domestic demand and household consumption, we should pay attention to the deleveraging of non-financial enterprises and governments as well as the reduction of the household debt leverage, which may relieve the consumption suppression effect caused by the rapid increase of household debt level. Second, as the reduction in the household debt ratio will stimulate household consumption, against the backdrop of the current decline in the growth of household income, this will result in a decline in the household savings deposits of residents, and thus reduce the supply of credit funds and an increase of the funds price, which will slow the growth of investment, especially that of private enterprises with limited access to financing. Therefore, the policy to reduce the household debt ratio should be companied with the means of promoting private investment, such as cutting tax and fee, reducing administrative intervention and improving the business environment, so as to avoid hurting private investment that is currently in distress. Third, on the whole, although the reduction in the household debt ratio will accelerate China’s economic growth, its effect is not significant. The reason is that in addition to being limited by the current model’s analytical framework, it is also related to the small proportion of household consumption in the economy. With the further

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3 Policy Simulation: Effects of Changes in the Household Debt …

implementation of the strategy of expanding domestic demand, the proportion of consumption in the economy will continue to increase, and the effect of reducing the household debt ratio on economic growth will become more significant. Therefore, in the context of China’s current economic growth may continue to slow down, timely suppression of the rise in the household debt ratio will help China’s economic growth momentum and reduce its constraints on economic growth.

Chapter 4

Policy Implications and Suggestions

In terms of investment, in 2018, China continued to take de-leveraging measures to reduce the rapidly rising debt ratios of financial institutions, local governments and non-financial enterprises, especially SOEs, to prevent systemic risks. The rectification of the financial order effectively prevented the expansion of the off-balance sheet credit of the banking system. In the first half of 2018, while the size of new financing in the whole society declined, the proportion of new RMB loans to the total amount of new social financing rose significantly to 96.3%, an increase of 22.5 percentage points over the same period of the previous year. The strengthening of financial supervision has alleviated the situation that credit resources deviated from the real economy to the virtual economy to a certain extent, but it has also closed down other channels that can obtain funds except domestic loans. As a result, in the first half of 2018, the growth rate of infrastructure investment fell markedly to 7.3% YoY, down 13.8 percentage points compared with the same period of the previous year. The investment in real estate development only grew by 4.6% YoY, down 6.6 percentage points over the same period last year. As the growth of manufacturing investment continued to slow down, the total FAI (excluding farmers) in the whole society went up by 6.0% YoY, 2.6 percentage points lower than the same period of the previous year. In terms of foreign trade, thanks to the simultaneous recovery of the global economy, China’s exports and imports grew rapidly in 2017. However, since the second half of 2018, the trade disputes unilaterally provoked by the US have not only disrupted the global trade order, but also begun to impact China’s foreign trade. China’s private investment, which is oriented toward manufacturing exports, bears the brunt. Since 2016, the upward trend of private investment growth has begun to reverse. This year and next, since China’s trade partners other than the US, such as the EU and ASEAN, are expected to maintain stable economic growth, and processing trade has a large share of China’s current foreign trade, the negative impact of the current Sino-US trade war on China’s GDP growth is expected to be limited. However, in the long term, the negative impact of the trade war on private investment will heighten the pressure on China’s economic downturn, and thus deserve high attention. © Springer Nature Singapore Pte Ltd. 2019 Centre for Macroeconomic Research, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-13-6077-0_4

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4 Policy Implications and Suggestions

In terms of consumption, in the first half of 2018, the total retail sales of social consumer goods increased by 9.4% YoY, a decrease of 1.0 percentage points from the same period of the previous year, setting a new low in the past decade. Although the reasons for this decline in growth rate have yet to be clarified, two important facts cannot be ignored: First, the growth of residents’ real income still shows a downward trend. In the first half of 2018, the disposable real income of urban residents increased by 5.8% YoY, 0.7 percentage points lower than that of the same period of last year. The disposable real income of rural residents rose by 6.8% YoY, down 0.6 percentage points over the same period last year. Second, since 2009, China’s household sector has seen a sharp rise in its debtto-GDP ratio due to the rapid increase in housing loans, increasing from 18.9% by the end of 2009Q1 to 49.3% by the end of 2018Q1, up by 30.4 percentage points and with an average annual growth rate of 11.2%. The rapid accumulation of China’s household debt has not only offset China’s de-leveraging efforts so that the overall economic leverage has not dropped significantly, but also directly inhibited the growth of household consumption expenditures, heightening the pressure on economic downturn. Why has the pressure of China’s economic downturn not only persisted in the past decade, but it is still growing? The reason is that the investment-driven growth pattern of the Chinese economy has not yet been reversed. Until 2015, during the period of rapid decline in the growth of foreign trade and private investment, China had to rely on investment in infrastructure and real estate. Since 2016, while the growth of private investment has been difficult to rebound and real estate development investment has begun to slow down due to excess supply, China had to continue to increase investment in infrastructure and investment by SOEs to stabilize investment growth. Meanwhile, due to the long-term credit policy oriented to SOEs and the soft budget constraints of SOEs, the huge liquidity injected into the economy rapidly raised the high debt of non-financial SOEs. Furthermore, with governments’ implicit guarantees, the liquidity released by the loose monetary policy have greatly satisfied the funds needs of the real estate enterprises, the local government financing vehicles, and the zombie SOEs through the shadow banking system, which in turn pushed up the debt leverage of governments and SOEs. As a result, the debt ratio of the nonfinancial sector and the financial sector expanded rapidly, directly increasing the systemic risk in the economy. Therefore, since 2017, for purpose of preventing and controlling systemic risks, China’s policy maker has begun to strictly rectify financial chaos and reduce leverage. And the strengthening of financial supervision at all levels of government has led to a sharp decline in the ability of banks to derive credit via various channels of non-banking channels. In the first half of 2018, the proportion of new RMB loans to the total amount of new social financing rose sharply to a record level of 96.3%. The shrinking total credit supply and the closure of credit supply channels have greatly curbed the growth of investment demand. In a word, in the investment-driven economic growth pattern, once the growth of private investment is hard to accelerate, it would be difficult to crack such cycle that “to stabilize GDP growth → loose credit → rising debt leverage of local govern-

4 Policy Implications and Suggestions

45

ments, SOEs enterprises and real estate enterprises, and households → tight credit, and financial rectification → decreasing GDP growth”. After entering the second half of 2018, the emergence of two new factors has further heightened the downward pressure on the Chinese economy. First, the growth rate of investment by state-owned and state-controlled enterprises fell markedly to 3% in the first half of the year, down 9 percentage points from the same period of the previous year. Second, the trade disputes unilaterally provoked by the US began to curb the rebound of private investment growth. As a result, in order to stabilize investment, China has to accelerate the growth of infrastructure investment since 2018Q3. In view of the current complicated international economic situation, we design two scenarios of Sino-US the trade disputes: Scenario 1, China and the US implement the duty scale and the tariff rate that have been announced; and Scenario 2, from 2018Q4, China and the US further expand the duty scale and increase tariff rates. Based on the CQMM model, we conduct forecasts on the key indicators of China’s macroeconomics this year and next. The results show that although the Chinese economy has experienced some period of transformation, the dependence on foreign trade has dropped significantly, and China’s economic growth has been quite resilient, the Sino-US trade war would have negative impacts on China’s economic growth. Due to the trade transfer effect, China’s current foreign trade with the characteristic of processing trade, and macroeconomic policies stabilizing economic growth, the negative impacts of Sino-US trade war on China’s GDP growth via trade channels in the short run would be limited, and the downward pressure on China’s economic growth would be mainly due to slowdown in the growth of investment and consumption. The CQMM predicts that in two different scenarios, China’s GDP growth rate is expected to remain in the range of 6.58% to 6.64% in 2018, 0.26 to 0.32 percentage points lower than that in 2017. And in 2019, it is projected to further decline to the range of 6.42–6.48%. Second, since the value of exports of non-SOEs accounts for nearly 90% of China’s total value of exports, the Sino-US trade war would directly impact on the investment of non-SOEs which are oriented to manufacturing exports. The CQMM predicts that in two scenarios, the growth rate of investment by non-SOEs is anticipated to remain in the range of 7.95–8.14% in 2018, and in 2019 further fall to the range of 4.12–4.62%. As private investment accounts for more than 60% of total investment, the trade was is likely to curb the rapid rebound in private investment since 2017. As a result, the growth rate of FAI (excluding farmers) measured at current prices in 2018 is set to remain in the range of 5.49% to 5.61%, lower than the 7.2% level in 2017; and in 2019 further fall to the range of 4.15–4.45%. If the growth of private investment would not rebound quickly, then China’s economic structure adjustment and the improvement of economic efficiency would be affected. First, the decline in private investment growth has directly inhibited the expansion and transformation of China’s industry, especially manufacturing. In recent years, although industrial production has remained stable, the growth rates of industrial value added are still below 7%, which is a low level since 2000. Second, the decline in private investment growth has distorted China’s investment structure. In

46

4 Policy Implications and Suggestions

recent years, in order to stabilize investment, the share of manufacturing investment to total investment has continued to decline, while the share of infrastructure real estate investment has continued to increase and remained high. Such an investment structure has not only reduced investment efficiency, but increased the fragility of the financial system. Finally, in the near future, increasing labor productivity in manufacturing is an important guarantee for increasing the growth of residents’ real income, and effective investment (especially private investment) is necessary to promote the transformation and upgrading of manufacturing and accelerate the improvement of labor productivity. Therefore, the negative impacts of current trade war on private investment and manufacturing investment deserves high attention. In addition, given the rapid expansion of China’s household debt scale and the rapid increase in debt ratio, based on the CQMM, we conducted a counter-factual empirical analysis of the impact of changes in the debt ratio of China’s household sector on household consumption, investment and economic growth. Its conduction mechanism is as follows: Changes in the household debt ratio of residents affect both household loans and deposits. First, assuming a reduction in the debt ratio of the residents, the reduction in household loans would result in a decrease in funds demand and a decrease in the price of funds (Interest rates), which would stimulate investment. This path is defined as “investment channel”. Secondly, if the household debt ratio declines, the household’ incentives for preventive savings would fall, which would increase consumption and decrease household deposits, and thus reduce the supply of funds, and increase the price of funds, as a result, and investment would be curbed. This path is defined as “consumption channel”. Assume that the household debt ratio both in 2016 and 2017 remain at the level of 38.8% in 2015Q4, 8.0 and 18 percentage points lower than the actual values in 2016 and 2017 would respectively. The counterfactual analysis based on CQMM shows that the consumption channel effect of the change of China’s debt ratio is stronger than the investment channel effect, indicating that reducing the household debt ratio is conducive to accelerating the growth of consumer spending. Nonetheless, the decline in the household debt ratio would result in a decline in household savings deposits, which in turn would reduce the supply of credit funds and increase Interest rates, resulting in a decline in investment growth, especially in private companies that lack diversified financing instruments. Combining the effects of the above two aspects, the decline in the household debt would eventually increase GDP growth rate slightly. In 2016 and 2017, the GDP growth rate would be 0.01 and 0.06 percentage points higher than the baseline simulated values respectively. Although reducing the household debt ratio only has a weak effect on economic growth, it would be conducive to promoting the structural adjustment of the economy. In summary, in the face of the downward pressure on the current economy, there are two issues that deserve high attention: the first is the negative impact of current the trade disputes on private investment and manufacturing investment, and the second is the negative impact of the rapid rise in the household debt ratio to household consumption growth. First, we should pay high attention to the negative impact of current the trade disputes on private investment and manufacturing investment.

4 Policy Implications and Suggestions

47

If the growth of private investment would not substantially rebound, the slowdown in the growth of FAI in the whole society would curb economic growth. With the economic slowdown, the need for local government infrastructure expansion, and its dependence on land finance, the financial sector’s preference for SOEs and the real estate may be the restored. It is difficult to reverse the situation that credit resources are deviating from the real economy to the virtual economy or idling within the financial system. Therefore, as the Sino-US trade war would continue to escalate, while preventing and controlling financial risks, it is necessary to effectively stimulate private investment, improve resource allocation efficiency, promote the transformation and upgrading of China’s manufacturing industry, and improve labor productivity. To this end, we put forward the following suggestions: 1. While monetary policy is controlling the total amount, it is necessary to maintain a reasonable and sufficient liquidity to provide conditions for stable investment growth. While maintaining a reasonable growth of the broad money M2, credit and social financing scale, the focus should be on adjusting the credit structure to ensure that the proportion of loans to non-financial enterprises and institutional groups is stable at more than 50%. In 2016 and 2017, loans to non-financial enterprises, governments and social groups accounted for only 48.2 and 49.6% of new RMB loans, respectively. In the first half of 2018, the proportion increased to 57.3%. This year and next year, it should remain above 50%, only then can we reverse the situation that credit resources are deviating from the real economy to the virtual economy. 2. Full consideration should be given to the financial risk and market tolerance faced by de-leveraging policies. While grasping the supervision efforts, we should coordinate the timing of the introduction of various policies and improve the linkage of financial supervision systems at all levels. Preventing financial risks and serving the real economy should be parallel. In addition, effectively improve the ability and willingness of financial services to the real economy. 3. Continue to implement active fiscal policy, adopt measures such as tax cut and fee reduction, and cooperate with monetary policy to ensure that liquidity actually enter the real economy. Meanwhile, stimulate the development of small and medium-sized enterprises and promote the upgrading of industrial structure. Second, we should pay much attention to the negative impact of the rapid rise in the household debt ratio to household consumption growth. China’s household debt ratio has surpassed the average of emerging countries in 2011, and has since gradually widened the gap. The difference with developed countries has also shrunk dramatically. Under the background of China’s aging population, the far from perfect social security system, and the still grim urban-rural income gap, especially as the growth of the residents’ real income edges down due to the slowdown in labor productivity growth, the rapidly rising household debt ratio will curb the increase in household consumption and hinder the transformation of economic growth patterns.

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4 Policy Implications and Suggestions

To this end, we put forward the following suggestions: First, as the unprecedented expansion of the current housing loan scale is the main reason for the sharp increase in the household debt ratio, we should vigorously rectify various irregularities in real estate development loans. While limiting the amount of domestic loans flowing into real estate investment, we should continue developing the housing leasing market and promote the equilibrium of supply and demand in the regional housing market. Second, further promote the reform of the fiscal system to help local governments get rid of their dependence on land finance. In the past decade, as the impact of the financial crisis led to a sharp decline in the profit growth rate of industrial enterprises, the growth rate of fiscal revenue with industrial tax as the main source of taxation also fell sharply. Local governments have therefore begun to increase their reliance on land finance, which directly pushed up the bubble in the real estate market. In order to reverse the current local government’s dependence on land finance, the implementation of real estate tax is imperative. In addition, the reform and improvement of the fiscal system should ensure the matching of local government financial resources and expenditure responsibilities.

Appendix Report on the Questionnaire Survey on China’s Macroeconomic Situation and Policy in 2018

(October, 2018. No. 11) To keep abreast of the macroeconomic situation and policy trend, an annual questionnaire survey of China’s macroeconomic situation and policy started twice a year starting from the first time in August 2013, held by the Economic Information Daily, Xinhua News Agency and the Center for Macroeconomic Research, Xiamen University (one of the Key Research Institutes of Humanities and Social Sciences of the Ministry of Education of China). This is the eleventh-time questionnaire survey about the study. There were 19 questions directly about China’s macroeconomic situation and policy trend in the questionnaire, and we invited some domestic economists in relevant area for this survey by email in August 2018, and finally got responses from 110 of them. This survey offered the latest understandings and judgments of experts concerning the economic situation of the world, trends of some major indicators about China’s macro-economy, and trends of China’s macroeconomic policies in 2018. The results of this survey are presented as follows: The world economic situation in 2018 It was announced by the US Department of Commerce on July 27, 2018 that the real gross domestic product of the US increased at an annual rate of 4.1 percent in the second quarter of 2018, which was the best pace in nearly four years. In the first quarter, real GDP increased by 2.2 percent (revised from 2%). In July, IMF forecasted that the economic growth rate of the US would be 2.9% in 2018, in accordance with the forecast in April, 0.6 percentage higher than the rate in 2017. Hence, we conducted a questionnaire survey on the economic growth rate of the US in 2018. The survey reflected that 55.45% of the experts answered that the economic growth rate of the US would be “between 3.0 and 3.5%”. 27.27% of them claimed that it would be “between 2.4 and 2.9%”. 11.82% claimed that it would be “between 3.6 and 3.9%”. 0.91% of the experts thought that it would be “2.3% or less” and 4.55% of them anticipated that it would be “4.0% or more”. Overall, more than 90% of the experts believed that the growth rate of the second quarter of 2018 is unsustainable, but the final growth rate of GDP of the US would be higher than that of 2017. © Springer Nature Singapore Pte Ltd. 2019 Center for Macroeconomic Research, China’s Macroeconomic Outlook, Current Chinese Economic Report Series, https://doi.org/10.1007/978-981-13-6077-0

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The euro zone economy grew by 0.4% (seasonally revised) in the first quarter of 2018 compared to the same period of last year, and 0.7% lower than the fourth quarter of 2017. The IMF revised down the forecast for the economic growth rate of the euro zone in April by 0.2%, to 2.2% in 2018, which is 0.2% lower than 2017. We also conducted a questionnaire survey on the economic growth rate of the euro zone in 2018. The survey reflected that 63.64% of the experts estimated the number would be “between 2.0 and 2.2%” in 2018. 13.64% claimed that it would be “between 2.2 and 2.4%”. The last 22.73% claimed that it would be “2.0% or less”. Overall, all of the experts believed that the growth rate of the euro zone in 2018 would be lower than that of 2017. At the end of 2017, the exchange rate of USD/EUR was 1.1997. In the first four months of 2018, the average exchange rate of USD/EUR was 1.229, but Euro keeps deflation since May 2018 and the average exchange rate of USD/EUR from May to July is around 1.174. In the first half of 2018, the growth rate of the euro zone economy is slowdown, which may be the main cause of strengthening Euro unsustainable. Hence, we conducted a questionnaire survey on the variation trend and range of the exchange rate of USD/EUR at the end of 2018. The survey reflected that 65.45% of the experts estimated that “the Euro would continue to depreciate against the dollar, and at the end of 2018, the exchange rate of the dollar to the Euro would be between 1.05 and 1.19”, and the mean is about 1.1481(this question is gap filling). 29.09% of the experts claimed that it would keep stable. Only 5.45% of the experts believed that the Euro against the dollar would turn into appreciation, and the exchange rate of the dollar to the Euro by the end of 2018 would be between 1.20 and 1.25, and the mean is about 1.2125. Overall, more than 60% of the experts believe that there will be a big decline of the exchange rate of USD/EUR. But there are also about 30% of the experts believe the exchange rate to be stable. Forecast of some key indicators of China’s macro-economy in 2018 The real growth rate of China’s GDP in 2017 was 6.9%. According to the preliminary data released by China National Bureau of Statistics on July 17, the real growth rate of China’s GDP in the first half of 2018 was 6.8%, 0.1 percentage points lower than the same period of 2017. More specifically, the real growth rates of China’s GDP in the first and second quarters of 2018 was 6.8% and 6.7%, 0.1 and 0.2 percentage points lower than the same period of 2017, respectively. Hence, we conducted a questionnaire survey on the growth rate of China’s GDP in 2018. The survey showed that 56.36% of the experts thought that it would be “between 6.5 and 6.6%”. 31.82% expected that it would be “between 6.7 and 6.8%”. 8.18% of them claimed that it would be “6.5% or less” and 3.64% chose “between 6.8 and 6.9%”. In sum, because the GDP increased by 6.9% in 2017, all of the experts considered China’s economic growth would decline in 2018 compared to 2017. In the first half of 2018, China’s CPI increased by 2.0% compared to the same period of 2017. The increase amount was 0.6 percentage points higher than the

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same period of 2017. The core CPI increased by 2.0% excluding food and energy, 0.1 percentage points lower than the same period of 2017. How about the growth rate of China’s CPI in 2018? The survey showed that 67.27% of the experts expected the growth rate of China’s CPI would be “between 2.1 and 2.5%”, 25.45% thought that it might be “between 1.6 and 2.0%”, and another 7.27% held the view that it would be “2.6% or more”. In sum, more than 70% of the experts believed that the increase amount of CPI of China in the second half of 2018 would be higher than that of the first half. Since the CPI increased by 1.6% in 2017, all of the experts forecasted a certain upward trend of CPI in 2018. In the first half of 2018, China’s PPI increased by 3.9% compared to the same period of 2017. The increase amount was 2.7 percentage points lower than the same period of 2017. The increase amount gradually fell in the first quarter, and gradually expanded in the second quarter, ranging from 3.1 to 4.7% in the first half of 2018. How about the growth rate of China’s PPI in 2018? The survey showed that 63.64% of the experts expected it to be “between 3.1 and 3.9%”, 31.82% of them claimed that it would be “between 4.0 and 4.9%”, and another 4.55% forecasted the growth rate of PPI in 2018 to be “between 2.0 and 2.9%”. In sum, since the PPI increased by 6.3% in 2017, all the experts believed that the high growth rate of China’s PPI in 2017 would be unsustainable in 2018. In 2017, China’s investment in the fixed assets (excluding farmers’ investments) had a nominal increase of 7.2%, in which manufacturing investment increased by 4.8%, real estate investment increased by 3.6% and infrastructure investment increased by 19.0%. In the first half of 2018, China’s investment in the fixed assets (excluding farmers’ investments) increased by 6%, 2.6 percentage points lower than the same period of 2017. More specifically, manufacturing investment increased by 6.8%, 1.3 percentage points higher than the same period of 2017; real estate investment increased by 7.4%, 1.9 percentage points higher than the same period of 2017; infrastructure investment increased by 7.3%, 13.8 percentage points lower than the same period of 2017. (1) As for the nominal growth rate of China’s investment in the fixed assets (excluding farmers’ investments) in 2018, the survey showed that 32.73% of the experts anticipated it to be “between 6.5 and 6.9%”. 30% of them claimed it to be “between 7.0 and 7.4%”. 16.36% of them expected it to be no more than 6.4%. 14.55% of them believed that it would be “between 7.5 and 7.9%”. Only 6.36% of the experts chose “8.0% or more”. (2) As for the variation trend of manufacturing investment in 2018, 50% of the experts believed that the investment growth rate would be stable, 30% of them claimed that the investment growth rate would decrease and lower than that of 2017, another 20% of the experts expected the investment growth rate would increase and be significantly higher than that of 2017. (3) As for real estate investment in 2018, 49.54% of the experts claimed that the investment growth rate would decrease and lower than that of 2017. 36.70% of them believed that the investment growth rate would be stable, another 13.76% of the experts expected the investment growth rate would increase and be significantly higher than that of 2017. (4) As for infrastructure investment,

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37.27% of the experts expected the investment growth rate would increase and be significantly higher than that of 2017, 39.09% of them claimed that the investment growth rate would decrease and lower than that of 2017, another 21.82% of the experts expected the investment growth rate would be stable. Overall, more than 80% of the experts forecasted that the nominal growth rate of China’s investment in the fixed assets (excluding farmers’ investments) in 2018 would be higher than 6.4%. There were 50% of experts believing that the manufacturing investment growth rate would be stable and the real estate investment growth rate would decrease and lower than that of 2017 respectively. There were 40% of the experts showing that the growth rate of infrastructure investment would be higher than that of 2017, however, 40% of experts believing that it would be lower. In the first half of 2018, the growth rate of domestic loans of China’s investment in the real estate sector slumped to 7.9% under the strict real estate policy, and the growth rate was 30 percentage points lower than the same period in 2017. As a result, China’s investment in the real estate measured by funds source only had an accumulate growth of 4.6%, 6.6 percentage points lower than the same period in 2017. However, the regulation effects of the real estate market are different among cities: the sales prices of commodity houses in first- and second-tier cities have risen and fallen, meanwhile the prices of third-tier cities have raised sharply. The Economic Work Conference of the Political Bureau of the CPC Central Committee on July 31 clearly pointed out that in the second half of 2018; China must resolutely curb housing price increases and accelerate the establishment of a long-term mechanism to promote the stable and healthy development of the real estate market. Hence, we conducted a survey on China's real estate policy in the second half of 2018 (this question is multiple choice). The survey showed that 78.18% of the experts agreed that while limiting the amount of domestic loans flowing into real estate investment, China had better continue to promote the balance of supply and demand in the regional real estate market. 61.82% of the experts thought that we should make the housing rental market to begin to play a more important role while stabilizing housing prices. 50% of the experts suggested that in view of the current decline in housing stocks and rising of house prices in third- and fourth-tier cities, stabling housing prices would become the primary goal for local government regulation in third- and fourth-tier cities. 26.36% of them supported the idea of appropriately relaxing the restrictions on domestic loans flowing into real estate investment, stabilizing the growth of real estate investment and adhering to adjusting policies with the development of the city to ensure the reasonable purchase demand of residents. Some experts pointed out some other ideas, such as continuing to adopt strict control policies to curb rising housing prices, collecting property taxes, formulating more flexible land supply systems, differentiating land demand in different regions, increasing effective supply of land markets, and improving the regional supply structure of land market. China’s investment in the fixed assets (excluding farmers’ investments) increased by 7.2% in 2017. Among them, the investment of state-owned and state-holding enterprises increased by 10.1%, and private investment increased by 6%. In the first half of 2018, investment in state-owned and state-holding

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enterprises increased by 3%, 9 percentage points lower than the same period of the previous year; private investment increased by 8.4%, an increase of 1.2 percentage points over the same period of the previous year. In the first half of 2018, private investment accounted for 58.9% of the total investment, an increase of 1.3 percentage points over the same period of 2017; the contribution rate to all investment growth reached 81.5%, driving investment growth by 4.9 percentage points. (1) As for the investment growth rate of state-owned and state-holding enterprises in 2018, the survey showed that 32.73% of the experts claimed that it would be “between 6.0 and 7.9%” and the same proportion of the experts claimed it to be “5.9% or less”. 18.18% of the experts believed that it would be “between 8.0 and 9.9%”. 13.64% of them expected it to be “between 10.0 and 11.9%” and another 2.73% of them forecasted it to be no less than 12.0%. (2) As for the growth rate of private investment, the survey showed that 49.09% of the experts claimed it to be “between 8.0 and 9.9%” and 38.18% of them claimed it to be “between 6.0 and 7.9%”. There are 10 and 2.73% of the experts expecting it to be “5.9% or less” and “between 10.0 and 11.9%”, respectively. Overall, more than 80% of the experts the investment growth rate of state-owned and state-holding enterprises in 2018 would be lower than 10.1%, which was the growth rate of the same index in 2017. Meanwhile, there are also more than 80% of them believing that the growth rate of private investment would be higher than that of 2017. The total retail sales of consumer goods in China increased by 10.2% in nominal terms in 2017. In the first half of 2018, the total retail sales of consumer goods increased by 9.4%, a decrease of 1 percentage point over the same period of the previous year. How about the growth rate of China’s total retail sales of consumer goods in 2018? The survey showed that 36.36% of the experts believed it to be “between 9.5 and 9.9%”, 34.55% of them claimed it to be no more than 9.5, 28.18% of the experts expected it to be “between 10.0 and 10.4%” and 0.91% of them chose “between 10.5 and 10.9%”. Overall, more than 70% of the experts believed that the growth rate of China’s total retail sales of consumer goods in 2018 would be lower than that of 2017, which was 10.2% and more than 60% of them anticipated it to be higher than that of the first half of 2018. In 2017, China's exports of goods (in RMB) increased by 10.8%, and imports (in RMB) increased by 18.7%. In the first half of 2018, the cumulative export of goods increased by 4.9%, with a growth rate of 10.1 percentage points lower than the same period of the previous year, meanwhile, the total import of goods increased by 11.5%, and the growth rate decreased by 11.5 percentage points over the same period of the previous year. How about the growth rate of China’s total export and total import (in RMB)? (1) As for the nominal growth rate of total export, the survey showed that 48.18% of the experts anticipated it to be “5.0% or less”. 34.55% of them expected that it would be “between 5.1 and 7.0%”. 10.91% of them claimed it to be “between 7.1 and 9.0%”. The last 7.27% of them forecasted it be “between 9.1 and 11.0%”. (2) As for the nominal growth rate of total import, the survey reflected that 49.09% of the experts believed that it would be “between 11.0 and 13.9%”. 25.45% of them claimed it to be no more than 10.0% and 17.27% of them claimed it to be “between 14.0 and 16.9%”. The last 5.45% of the experts

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anticipated the growth rate to be “between 17.0 and 19.9%”. In sum, more than 90% of the experts believed that the nominal growth rate of total export would decrease compared to 2017 (10.8%), and more than 50% of them expected it to be lower than 5%. Even though more than 90% of them expected the nominal growth rate of total import to decrease compared to 2017 (18.7%), there are also more than 70% anticipating it to be higher than 11%. From the beginning of this year, the US Interest rate hike and the continued rise of the US dollar index have led to large fluctuations in the exchange rate of the RMB against the US dollar. Since June 14, the exchange rate of the RMB against the US dollar has continued to fall. As of the end of July, the central parity of the RMB against the US dollar was around 6.8310, a record low since December 2017. How about the change in the central parity of the RMB against the US dollar by the end of 2018? The survey 66.36% of the experts believed that RMB would continue to depreciate, the central parity of the RMB against the US dollar by the end of 2018 would be between 6.8500 and 7.4120, and the mean of the expected central parity was 6.9716(this question is gap filling). 10% of the experts believed that it would turn to appreciate, and the central parity of the RMB against the US dollar by the end of 2018 would be between 6.3 and 6.8, with the mean 6.6033. The last 23.64% of them expected the exchange rate stable. On July 6, 2018, the US began to impose a 25% tariff on 34 billion US dollars of products from China. In response, the State Council Tariff Commission decided to impose a 25% tariff on imports of approximately 34 billion US dollars from the US on the same day. As a result, Sino-US the trade disputes have continued to escalate. Then, what is the impact of Sino-US the trade disputes on China's GDP growth rate in 2018? The survey showed that 40.91% of the expert expected that the growth rate of GDP would fall by 0.1-0.3 percentage points, and 35.45% of them anticipated a growth rate loss of GDP of 0.4–0.6 percentage points. 14.55% of the experts forecasted the growth rate of GDP would fall by 0.7–0.9 percentage points, and 7.27% of them claimed that the growth rate of GDP would fall by more than one percentage points, but there are still 1.82% of them believing that Sino-US the trade disputes would play no role in China's GDP. Overall, almost all the experts believed that Sino-US the trade disputes would affect the growth rate of China’s GDP to some degree and there are about 40% of them claiming that the decline of growth rate of GDP would be less than 0.3 percentage points. The global debt report released by BIS on May 31, 2018 showed that the debt ratio of the Chinese household sector (total debt/GDP) is rising rapidly: from 29.7% in 2012 to 48.4% in the fourth quarter of 2017. The rapid rise in the debt ratio of the household sector was associated with the high housing prices. In order to curb the debt risk of the household sector, the proportion of loans to households in the first half of the year was 39.9%, a decrease of 7.4 percentage points over the same period of the previous year and 12.8 percentage points over 2017. How about China's household sector debt risk in 2018? The survey reflected that 42.73% of the experts claimed the debt ratio would be in control, 35.45% of them thought that the debt ratio would continue to increase and curb households’ consumption expenditures. On the contrary, the last 21.82% of them believed that the debt ratio might

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turn down to prevent the risk. In short, more than 40% of the experts anticipated the debt ratio to be in control, and more than 20% of them believed that the debt ratio would not continue to rise, but decline. Macroeconomic policies to be introduced By the end of June in 2018, the balance of China’s broad money supply (M2) was 177.02 trillion RMB, an increase of 8 percentage points than the same time in last year, the growth rate was 0.3 and 1.1 percentage points lower than the end of last month and the same time of last year respectively. How about the growth rate of China’s broad money supply (M2) in 2018? The survey showed that 44.55% of the experts claimed the growth rate to be “between 8.2 and 8.7%”, 39.09% of them anticipated that M2 would increase by “between 7.6 and 8.1%”, 12.73% of them chose “between 8.8 and 9.4%”. Besides, there are 0.91 and 2.73% of the experts forecasting the growth rate no more than 7.5% and no less than 9.5%, respectively. Overall, more than 80% of the experts believed that the growth rate of China’s broad money supply in 2018 would be “between 7.6 and 8.7%”. According to the preliminary statistics of the People's Bank of China, in the first half of 2018, the total new financing of the whole society has increased by 9.1 trillion yuan, a decrease of 2.03 trillion yuan over the same period of the previous year. Among them, new loans in RMB increased by 8.76 trillion yuan, an increase of 550.34 billion yuan over the same period of the previous year; the proportion of new RMB loans accounted for 96.3% of the total new social financing, a significant increase of 22.5 percentage points over the same period of the previous year. Among the new RMB loans in the first half of 2018, the proportion of loans to non-financial enterprises and institutional groups was 57.3%, an increase of 1.7 percentage points over the same period of the previous year and an increase of 7.7 percentage points over 2017. The strengthening of financial supervision has alleviated the situation that credit resources are “de-solid” to a certain extent, but the continuous credit contraction and the return and shrinkage of financial institutions have also sharply tightened the total supply and the channels of funds, which may trigger new credit risk. In this regard, the Economic Work Conference of the Political Bureau of the CPC Central Committee on July 31 clearly pointed out that in the second half of the year, de-leverage should grasp the rhythm and opportunity. What adjustments will there be in the policy direction of preventing systemic financial risks in the second half of 2018 (this question is multiple choice)? The survey showed that 80.91% of the experts suggested that monetary policy should maintain a reasonable and sufficient liquidity while controlling the total amount, and provide conditions for stable investment growth. 78.18% of them advocated taking full consideration of the financial risk factors and market tolerance faced by deleveraging, and coordinating the timing of various policies while improving the supervision, and improving the linkage of the financial supervision system. 55.45% of the experts agreed that preventing and defusing financial risks and serving the real economy should both be considered and the ability and willingness of financial services to the real economy should be effectively improved through institutional

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innovation. Besides, a few experts pointed out some other suggestions such as drawing more attention to trade war and intensifying the system reform of stated-owned banks. The Economic Work Conference of the Political Bureau of the CPC Central Committee on July 31 clearly stated that fiscal policy should play a greater role in expanding domestic demand and structural adjustment. Hence, we conducted a survey on China’s fiscal policy in the second half of 2018 (this question is multiple choice)? The survey stated that 79.09% of the experts suggested that the active fiscal policy would adopt measures such as tax reduction and fee reduction, and cooperate with monetary policy to ensure the liquidity of real economy in promoting structural adjustment of the economy. They also advocated promoting the development of small and medium-sized enterprises and the upgrading of industrial structure at the same time. 72.73% of them agreed that under the circumstance that the downward pressure on investment growth is increasing, the active fiscal policy would play a role once again to address weak links through infrastructure investment. 66.36% of them endorsed adjusting and optimizing the structure of fiscal expenditures, ensuring support for key areas and projects, and improving the efficiency of fiscal funds. 61.82% of them claimed that the expansionary fiscal policy would play a role in preventing and resolving major risks, eliminating poverty, and preventing pollution to build a moderately prosperous society in all respects. There are also some other standpoints such as increasing the economic infrastructure of large cities and the investment in social infrastructure for population inflows. In the first half of 2018, the revenue from the transfer of state-owned land use rights of local governments in China was 2.69 trillion yuan, which was 5.2 trillion yuan in 2017, an increase of 36% and the growth rate was 8.2 percentage points higher than that of the same period of the previous year. The proportion of land sales revenue in total fiscal revenue was 25.8% in the first half of 2018, an increase of 5.9 percentage points over the same period of 2017. How about the growth of land use rights transfer revenue (this question is multiple choice)? The survey showed that 83.64% of the experts suggested that under the background of preventing local debt risks and narrowing local financing channels, some local governments might sell land to repay hidden debts. 67.27% of them thought that the situation that the land selling market of many third- and fourth-tier cities continues to go well might be the main reason for the increase in the country’s land sales revenue. 46.36% of them believed that in order to reduce the local government’s dependence on land finance, the implementation of real estate tax would be imperative. 38.18% of them claimed that the substantial increase in land sales revenue would continue to drive up the price of real estate. Besides, some experts stated out some other opinions such as reforming and improving the fiscal and taxation system, streamlining local government agencies to ensure local fiscal balance. High-quality development and deepening reform and opening up will be the main line of China's economic and social development in the next stage. What the focus of the Chinese government's macro policy in the next stage will be (this question is multiple choice)? The survey showed that 82.73% of the experts

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Table A.1 Forecast of key indicators of China’s economy by the CQMM team and the experts By the CQMM team: %

By Experts: % Interval

Ratio

GDP

6.64

CPI

2.09

PPI

3.09

Total retail sales of consumer goods

9.34

Total FAI

5.61

6.5–6.6 6.7–6.8 2.1–2.5 1.6–2.0 3.1–3.9 4.0–4.9 9.5–9.9 10.0–10.4 6.5–6.9 7.0–7.4

56 32 67 25 64 32 36 35 33 30

advocated stabilizing the investment environment, increasing opening up to the world, relaxing market access; and protecting the legitimate rights and Interests of foreign-funded enterprises in China, providing better services for enterprises from all over the world to invest in China; and promoting the development of the “Belt and Road”. 80% of the experts suggested deepening the supply-side structural reform, accelerating the construction of a modern economic system; and strengthening the protection of intellectual property rights, and making innovation the first driving force for development. 69.09% of them recommended increasing employment through vigorous development of the service industry, ensuring the steady growth of basic livelihood expenditures such as wages, education, and social security, strengthening the poverty alleviation work in poor areas, and narrowing the income gap. 60.91% of them agreed with developing the economy stably and healthily, adhering to the implementation of proactive fiscal policies and prudent monetary policies, and improving foresight, flexibility and efficiency of policies. 57.27% of them were in favor of implementing a rural revitalization strategy and a regional coordinated development strategy. Besides, some experts put forward many other suggestions, such as further implementing the policy of tax relief and fee reduction; reducing the operating cost of the real economy; further improving the business environment, clarifying and protecting private property rights, magnifying the development space of the private economy; promoting fair competition and improving regulatory policies (Table A.1).