1.Data dump – July econ data
The stats bureau released monthly economic data for July on Wednesday morning.
- Industrial production growth came in at 4.8% y/y – down from 6.3% in June, and the lowest print since February. Accounting for seasonal distortions, that’s the slowest print in decades.
- Retail sales growth came in at 7.6% y/y – down from 9.8% in June, and the lowest print since April.
- Fixed asset investment growth came in at 5.1% y/y – down from 6.3% in June and the second slowest growth rate in 2019, after May’s 4.7%.
Get smart: The June upside surprise in the monthly data (see July 15 Tip Sheet) was turned on its head in July – unsurprisingly.
Get smarter: We are now mid-way through Q3 and the economy has showed no signs of stabilizing. We had always expected things to bottom out late in the year – but it increasingly looks like that won’t happen until 2020.
Remarkably, authorities continue to remain reticent to stimulate – as they have finally understood that such measures do more long-term harm than short-term good.
The upshot: This new policy approach is positive for China’s medium-term economic outlook, but for the next six months, it means the world’s second-largest economywill be a drag on global growth.
Caixin:China Economic Data Show More Slowing in July
2. Auto sector woes deepen and widen
As the monthly econ data show, China’s domestic consumer engine is sputtering (see previous entry).
Regular Tip Sheet readers know that a big part of that is down to the auto market.
For the most part, the pain has come from traditional autos.But now the all-important market for new energy vehicles (NEVs) is starting to get hit (Caixin):
- “Sales of NEVs — a category that includes pure electric and hybrid electric cars — fell 4.7% in July from a year earlier to 80,000 vehicles, the first decline since January 2017.”
- “Chinese automakers produced 65,000 pure electric cars in July, down 4.8% year-on-year, while sales of such vehicles rose 1.6% to 61,000.”
- “Production of plug-in hybrids declined 13.2%, and sales fell 20.6%.”
According to China’s auto industry association, it’s not just down to economics:
- “The association attributed the rare decline to fading government subsidies for NEVs.”
Get smart: Weak overall consumption growth and ongoing withdrawal of subsidies will continue to challenge consumer uptake of NEVs.
Get smarter: That will make it harder for the government to hit its penetration targets for the sector.
Caixin:New-Energy Vehicle Sales Go Into Reverse
3.A temporary tariff delay
On Tuesday evening Beijing time, Vice Premier Liu He spoke with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.
Liu’s message: Those new tariffs aren’t cool (Xinhua):
- “In the phone talks, China lodged solemn representations concerning U.S. additional tariffs on the Chinese imports starting on Sept. 1.”
Guess what happened after the call? The US decided to get rid of some of the tariffs – and delay others (USTR):
- “Certain products are being removed from the tariff list based on health, safety, national security and other factors and will not face additional tariffs of 10 percent.”
- “Further, as part of USTR’s public comment and hearing process, it was determined that the tariff should be delayed to December 15 for certain articles.”
Specifically, imports that are dominated by Chinese production – and don’t have an easy alternative source – will see tariff delays (Axios):
- “[The] list of goods…that won’t be subject to a 10% tariff until Dec. 15 is made up of ‘products where 75% or more of the 2018 U.S. imports of that product were from China.’”
Get smart: The Chinese will interpret this as a sign of American weakness – and proof that the yankees don’t have the stomach for a prolonged fight.
Xinhua: Chinese, U.S. chief trade negotiators hold phone talks
USTR: USTR Announces Next Steps on Proposed 10 Percent Tariff on Imports from China
Axios: Scoop: How the U.S. decided which China tariffs will be delayed
4.Hong Kong chaos continues
Hong Kong continues to be wracked by protests.
Things got ugly in the airport last night (SCMP):
- “Protesters spent hours detaining a young man they claimed was an undercover agent from mainland China.”
- “He was seen later with his hands secured with cable ties and surrounded by protesters, who would not let paramedics take him away at around 10pm after he lost consciousness.”
And protests were not confined to the airport:
- “Hundreds of medical professionals…staged sit-ins at more than 10 public hospitals…to condemn the use of force by police.”
Hong Kong Chief Executive Carrie Lam called (again) for calm:
- “Let’s spend one minute to look at our city and our home.”
- “Can we bear to push it into an abyss where everything will perish?
But Lam’s credibility has evaporated:
- “A poll from August 1 to 6…found that Lam’s support rating had dropped to 27.9 points out of 100, a new low.”
Pictures of People’s Armed Police forces gathering in Shenzhen – just across the border from Hong Kong – are now all over the internet, both in China and abroad.
The big question: Is the gathering of forces in Shenzhen a bluff by Beijing, or a genuine threat?
The grim reality: Either way – an escalation of violence looks likely.
5.Shanghai offers new incentives to foreign companies
Yesterday, the Shanghai city government released a policy to attract MNCs to set up Asia regional headquarters (RHQs) in the city.
Some context: This is an update to a policy originally released in 2017.
More context: Shanghai is home to nearly 700 RHQs, the most of any mainland city – but still far behind Singapore and Hong Kong.
The new policyeases requirements for MNCs to be recognized as regional RHQs.
- The threshold for parent companies to set up RHQs was lowered to USD 200 million from USD 400 million.
It will also get easier for MNCs to set up holding companies:
- The asset threshold of foreign investors was lowered to USD 200 million from USD 400 million (one year prior to application).
- Requirements for paid-in capital and previously existing domestic investment were scrapped.
The new regs also give certain RHQs more leeway to manage cross-board capital.
Get smart: Shanghai isa great location for MNCs who want to be close to the China market, but Singapore and Hong Kong still have Shanghai beat in terms of cross-board capital management and the overall business environment.