德意志银行：图片中的中国缓慢但持续的无力

DeutscheBank

Research

ChinainPictures

Slowbutpersistentweakness

MacroStrategy:

HazelLai

Hazel-a.lai@

PerryKojodjojo

Distributedon:22/07/202400:02:11GMT

Perry.Kojodjojo@

Economics:

DeyunOu

Deyun.ou@

YiXiong

Yi.xiong@

July2024

IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.MCI(P)041/10/2023.UNTIL19thMARCH2021INCOMPLETEDISCLOSUREINFORMATIONMAYHAVEBEENDISPLAYED,PLEASESEEAPPENDIX1FORFURTHERDETAILS.

EconomicsSummary口

•China’seconomicgrowthdeceleratedinrecentmonths.Despiteareboundinexports,domesticdemandhassoftened

somewhatinQ2.Asaresult,GDPgrowthslowedto4.7%inQ2from5.3%inQ1.Thedragmainlycamefromtheservices

sector,ledbyanunderperformingpropertysector.Thesedevelopmentshaveledustoadjustdownour2024GDPforecast

to4.9%.

•Lookingatthekeyeconomicsectors:(1)Thepropertysectoroutlookisstillunfavorabledespiterecentpolicyeasing,

owingtoalargeinventoryoffinishedandunfinishedhomes.(2)Householdconsumptionspendingcontinuedtorecoverat

amoderatepace,butitwasconstrainedbyslowerincomegrowthandstill-weaksentiment.(3)Exportswilllikelyremaina

brightspotoftheeconomyinH2,buthowtraderelationsunfoldbeyondthatwillbeakeyfocalpoint.

•Inflationhasgraduallyimprovedtopositiveterritory,butlowerhousingandcarpricesarepreventingastronger

inflationrecovery.Weexpectconsumerinflationwillkeeponimprovingtoslightlybelow1%byend-2024andfurtherto

1.4%in2025,yetbelowits2%long-termaveragelevel.

•Policymakersmayneedtorethinktheirnear-termpolicymixtoachievethe5%annualgrowthtarget.Inparticular,a

budgetrevisionmightbenecessarytokeepupthepaceofspendingagainstacontinueddeclineinlocalgovernment

revenues.ThePolitburomeetinginlate-Julywillbeakeyeventforthesignalingofadditionalpolicysupport.

•ThePBOCwillcutrateonlymodestly,facingmultipleconstraints.Weexpecta10bpsratecutbythePBOCbeforeend-

2024,likelyinQ4.Aratecutremainsnecessaryconsideringthesofteningcreditdemandandlowinflation,butthePBOC

alsoneedstokeepastablecurrencyagainstastill-strongUSdollar.Perhaps,thereisariskofmoreeasingif(a)theFedwas

toeasefasterandsoonerand/or(b)pressureonRMBweaknesswastoabate.

ChinainPictures|YiXiong&DeyunOu|July20241

DeutscheBankResearch

MacroStrategySummary口

•Capitaloutflowspersist.DespitethepropertypackagerolledoutinMay,propertysalescontinuetodisappoint,leadingto

areversalinequityinflowsfromearlierintheyear.Theratedifferentialvstherestoftheworld,meanwhile,continuesto

support‘hotmoney’outflows,risingFXdeposits,andlowexporterconversionratios.ConcernsaroundworseningUS-China

relationshavealsoledtoanotablewideninginnetdirectinvestmentoutflows.

•ThePBoCistolerantofaweakerRMBvstheUSDfornow.ThedriftintheUSD/CNYfix,andthelimitednatureofFX

intervention,suggeststhePBoCis(fornow)allowingsomeRMBweakness,thoughitiskeentomanagethepaceto

minimizetheriskofaddingtocapitaloutflowpressures.ItsFXpolicybiasislikelyinformedby:(a)theneedtoalleviate

someofthedepreciationpressureinthesystem,(b)maintainingexportcompetitiveness;and(c)openingupspacefor

furtherpolicyeasing.Hence,westillliketobelongAUD/CNH.

•HedgeRMBweaknessvialong-datedcallsinonshoremarket.Forcorporates,webelieveUSD/CNYcallsarethebest

instrumentsforcorporatestohedgeRMBweakness,whilemaintainingsomeexposuretoRMBstrength.Moreover,thecost

of12MATMFcallscanbeoffsetbyUSD/RMBcarry,makingthenethedgingPnLalwayspositiveregardlessofwherethe

spotendsuptrading

•Bondcurvetosteepen.Intheabsenceoffurthereasing,weexpectfront-endratestoberangebound.Ontheotherhand,

webelievethebackofthebondcurveshouldsteepen.Why?(a)Thesupplyofbothultra-longCGBsandspecialLGBsisset

topickup;(b)demandfrombanksislikelytobeslowergiventheongoingwarningfromthePBoC;and(c)thepotential

startofthePBoCbond-sellingprogram.Assuch,wecontinuetorecommendpayingCNYNDIRS2/10steepener.

•Lowfundingcost.Theonshorefundingcostislikelytoremainlowagainstthebackdropofsubduedloangrowthandthe

PBoC’ssupportivemonetarystance.Hence,ChinaiscurrentlytheonlymarketinAsiathatofferscostsavingforcorporates

viaRMBbondsandswappingbacktoUSD.

•NotablepickupinPandabondissuance.AsofJuly,thefinancecostsavinghasincreasedupto83bp.GiventhattheChina

economicoutlookhasremainedgloomy,webelievethatthecostadvantagecouldsustainandhenceexpectingmore

Pandabondtobeissuedin2H2024.Afurtherpick-upinPandabondissuancecouldalsopushtheCNHCCSrateslower.

ChinainPictures|PerryKojodjojo&HazelLai|July20242

DeutscheBankResearch

Economics

Chinaexpectedtogrow4.9%in2024,afteradecelerationofgrowthinQ2口

130contributiontoConsumptionInvestment

9%realGDPgrowthNetexportsGDPgrowth

125

BreakdownofGDPgrowth

Seasonally-adjustedrealGDP,quarterly(Q42019=100)

Avg.4.5%growth

RealGDP,s.a.

2019Q4=100

Pre-Covidforecast(avg.5.5%growth)

u-Currentforecast

●

1.7

0.3

3.1

1.6

2.6

1.9

1.3

5.3

0.6

3.0

1.8

1.0

-0.8-0.5-0.2-0.6

7

120

1155

110

3

105

1001

95

-1

902015201620172018201920202021202220232024

H1

Source:DeutscheBankResearch,NBSSource:DeutscheBankResearch,NBS

.ThisthelowestsequentialgrowthChinahasseensinceQ42022,as

domesticdemandsofteneddespitestrongexports

•Wereviseddown2024GDPgrowthforecastto4.9%(from5.0%),expectinggrowthwillstayatjustbelow5%inH2.2025GDP

growthisforecastedat4.5%,broadlyinlinewithpost-Covidaveragegrowth

•Governmentmayneedtointroduceadditionalmeasurestoachievethe5%growthtarget.TheupcomingPolitburomeetingin

late-Julywillbeakeypolicyevent

'19'20'21'22'23'24

•Growthdeceleratedto4.7%YoYand0.7%QoQinQ2

ChinainPictures|YiXiong&DeyunOu|July20244

●

0.6

●

2.8

1.1

0.7

1.5

0.7

0.5

1.5

4.9

4.4

4.3

4.6

4.0

3.5

DeutscheBankResearch

Sequentialgrowthmoderatedinrecentmonths,draggedbysofterdomestic

demand

Industrialproductionandservicesoutput

MonthlyGDPgrowthestimates

RealGDPgrowthforecast,monthly

Industrialproductionservicesoutput

35%YoY

%YoY

RealGDPgrowth,quarterly

20

30

25

15

20

10

15

10

5

5

0

0

-5

-5

-10

-10

-15

'18'19'20'21'22'23'24

'19'20'21'22'23'24

Source:DeutscheBankResearch,NBSSource:DeutscheBankResearch,NBS

•Monthlyactivityindicatorsimpliedadecelerationofgrowth,to3.9%YoYinJunefrom4.6%inMayand5.4%inApril

•Dragtogrowthcamefromtheservicessector,wheregrowthslowedto4.2%inQ2aspropertymarketdeterioratedandgovernmentspendingreduced

•Meanwhile,industrialsectormaintaineda5.6%growthinQ2,inpartsupportedbystrongexports.

DeutscheBankResearch

ChinainPictures|YiXiong&DeyunOu|July20245

Labormarketsofteningstartedtonegativelyaffectconsumerspending

Migrantworkerpopulationandmonthlyincome

yuan

185

ChinainPictures|YiXiong&DeyunOu|July20246

Activemigrantworkers,million

monthlyincomeofmigrantworkers,

3800

4600

0

165

3600

3400

160

155

-5

3200

4400

175

54000

170

4200

20HouseholdsurveySpendinggrowthIncomegrowth1955000

%YoY1904800

15

10180

-101503000

20172018201920202021202220232024'17'18'19'20'21'22'23'24

Source:DeutscheBankResearch,NBSSource:DeutscheBankResearch,NBS

•Householdincomegrowthslowedto4.5%inQ22024from6.2%inQ1and6.3%in2023

•Thishasledtoslowerhouseholdspendingonitemssuchasfoodandbeverages,clothing,andlivingexpenses

•Migrantworkerpopulationcontinuedtoincreasetohistoricalhighs,buttheirmonthlyincomesawasmalldeclineinQ2

DeutscheBankResearch

Householdincomeandspendinggrowth

Propertysectordownturncontinueddespiteanewroundofpolicyeasing

Housingsalesinlargecities

Homepriceschanges

%,MoMNewhomeSecondarymarket

200

2.001.501.000.500.00-0.50-1.00-1.50-2.00

——30-citynewhomes20-citysecondaryhomesHousingsalesarea,10ksqms

150

100

50

0

'11'13'15'17'19'21'23

'19'20'21'22'23'24

Source:DeutscheBankResearch,HaverAnalyticsSource:DeutscheBankResearch,WIND

•Propertyinvestmentalsostayedlow.Housingnewstartshasdoppedto30%of2019levels.

•Itissomewhatencouraging,though,toseeareboundinnewandsecondaryhomesalesinlargecitieslately

•Housingpricescontinuedtodeclineinbothnewhomeandsecondarymarkets,despitethegovernment’seasingmeasuresannouncedinMay

DeutscheBankResearch

ChinainPictures|YiXiong&DeyunOu|July20247

Consumerinflationturnedpositivebutremainedsubdued

CPIbreakdown

CPIandPPIinflation

HealthcareTravel

Clothingandeducation

Transport&communication

CPI

%,YoY

105

120

115

110

105

100

95

90

85

2.52.01.51.00.50.0-0.5-1.0

Renting,HHfacilities&services

EnergyandfuelsOtherfood

Pork

CPI

100

95

90

85

PPIChina:ProducerPriceIndex(SA,2020=100)

China:ConsumerPriceIndex(SA,2020=100)

Jan-23Apr-23Jul-23Oct-23Jan-24Apr-24

'13'14'15'16'17'18'19'20'21'22'23'24

Source:DeutscheBankResearch,NBS,HaverAnalyticsSource:DeutscheBankResearch,NBS

•CPIinflationturnedpositiveafter2024LunarNewYearbutremainedsubduedin0-0.3%rangeinthepastfewmonths

•Porkprices-abigdriverofdeflationin2023-haverebounded,butotherfoodpriceshavedropped.Coreinflationalsostayedlowat0.6%YoYaspricesofcarsanddurablegoodscontinuedtodrop.

•WeexpectCPIinflationwillimprovegraduallyto0.9%byend-2024,averaging0.3%fortheyear.PPIinflationwilllikelystaynegativeinH2

DeutscheBankResearch

ChinainPictures|YiXiong&DeyunOu|July20248

Highlightsfromthethirdplenum:acceleratingstructuralreforms口

The3rdplenumofthe20thCPCCC,akeypolicymeetingfocusingonmedium-termreforms,washeldonJuly2024

ChinainPictures|YiXiong&DeyunOu|July20249

DeutscheBankResearch

•60categories,300+reformmeasurestobeimplementedin5years.Thenumberofmeasuresiscomparablewiththe

milestone18thCPCCCthirdplenumin2013,buttheimplementationperiodis2yearsshorter.Wecouldseealotofpolicy

changesinthenext2-3years.

•Theurgencyoffiscalreforms.Localgovernmentfinancesareclearlyunderpressureowingtoadropinrevenue,especially

fromlandsales.Inresponse,thethirdplenumproposedtoexpandinglocalgovernmentfiscalresourcesandtaxbase.A

consumptiontaxmaybeintroduced,whichcouldincreasethefiscalrevenue(andspending)oflocalgovernmentsinhigher-

incomeregions.

•Urban-ruralintegrationtonarrowthegapbetweenurbanandruralareas.Migrantworkersshouldenjoyequalhealthcareand

educationservicesasurbanresidents,socialsafetynettobestrengthenedruralareas;andrestrictionsonruralland

transactionsshouldbeeased.Thesemeasuresshouldimproveruralhouseholdincomeandspending,whichcouldbecome

animportantdriverofChina'sconsumermarket.

•Bolsteringprivatesectorconfidence.Theruleoflawisthebestbusinessenvironment,accordingtoHanWenxiu,asenior

partyofficialoneconomypolicy.Thethirdplenumemphasizedontheimportanceofpromotingentrepreneurialspiritand

buildmoreworld-classenterprises.Itwillformulateandimplementalawonpromotingtheprivateeconomyandwillprevent

theuseofadministrativeandcriminalmeanstointerfereineconomicdisputes.

•Openingupandattractingforeigninvestmentremainsakeypolicyfocus.ThegovernmentaimstoexpandFDIinflows,which

won'tbeaneasytaskundertoday'sglobaleconomicandgeopoliticalenvironment.Thegovernmentaimstobringdomestic

rulesandinstitutionstointernationalstandards;provideconvenientresidence,medicalcare,paymentandotherservicesto

foreignerscomingtoChina;andopeningupChina'sservicessectorforforeigninvestmentineducation,ITandhealthcare

businesses.

PBOCrevampsitsmonetarypolicyinstrumentsamidcreditslowdown

PBOC’snewinterestratecorridor(overnightrepo/revrepo)

Totalsocialfinancinggrowthandgovernmentbondyield

R007

PBOCONrevrepo

%YoY

DR007

7dOMO

PBOCONrepo

Totalsocialfinancing10yCGBYield

18

16

14

12

%4

5.04.54.03.53.02.52.01.51.0

3

10

8

2

6

4

1

'16'17'18'19'20'21'22'23'24

Source:DeutscheBankResearch,PBOC

'16'17'18'19'20'21'22'23'24

Source:DeutscheBankResearch,PBOC,Wind

•China’smoneyandcreditgrowthslowedsharplyinH1,owingtobothcontractionofproperty-relatedloansandPBOC’seffortstocurbinefficientbanklending

•Banksinturnparkedmoreliquidityinfinancialinstruments,drivingbondyieldlower

•PBOC’sfocusonexchangeratestabilitylimitedthescopeforcutpolicyrates.Weexpectonlyone10bpscutinQ4

•PBOCisenhancingitspolicytoolstoguidemarketinterestrates,includingthrough

establishinganewshort-terminterestrate

corridor

aroundthe7dOMOrate,andrestartbondtradingtointerveneinthebondmarket

DeutscheBankResearch

ChinainPictures|YiXiong&DeyunOu|July202410

Governmentspendingslowed,andabudgetrevisionismaybenecessaryinH2

Fiscalbalance

%YoY3mmaFiscalrevenueFiscalspending

30

20

10

0

-10

-20

-30

2018201920202021202220232024

Governmentbondissuance,ytd

RMB,tr2021202220232024

12

10

8

6

4

2

0

JanFebMarAprMayJunJulAugSepOctNovDec

Source:DeutscheBankResearch,MoFSource:DeutscheBankResearch,Wind

•Totalfiscalspendingshrankby-2%YoYinthefirst5monthsof2024andstayedonadownwardtrajectoryinrecentmonths

•Althoughgovernmentborrowinghasbeenaccelerating,thedropinrevenues,especiallyfromlandsales,constrainedlocalgovernmentsspending

•Annualfiscalspendingwilllikelystillbelowerthanexpected,growingby1.5%YoY.Toachievethe5%annualgrowthtarget,abudgetrevisiontoallowmorefiscalspendingismaybenecessaryinH2

ChinainPictures|YiXiong&DeyunOu|July202411

DeutscheBankResearch

ExportsoutperformedinH12024,supportedbystrongerdemandfromEMsand

developingeconomies

Exportsandtradebalance

BillionUSD,seasonallyadjusted

120

100

80

60

40

20

0

——TradebalanceExports,rhs

'21'22'23'24

340

320

300

280

260

240

220

200

Source:DeutscheBankResearch,HaverAnalytics

China’sexportsbydestination

250

230

210

190

170

150

130

110

90

70

50

China'sexportsbydestination,2017=100

ExportstoEMDEs

ExportstoAdvancedEconomies

201520162017201820192020202120222023202

Source:DeutscheBankResearch,IMF,HaverAnalytics

•Exportswilllikelyremainabrightspotoftheeconomy,drivenbyincreasingexportstoemergingmarkets/developingcountries

•China'sexportstoEMDEsalmostdoubledbetween2018and2023,whileexportstoadvancedeconomiesonlyincreasedby20%.TheshareofEMDEsinChina'stotalexportshasrisenfrom35%in2017to45%lately

•WeexpectChina'sexportstoEMmarketswillstaystronginH2,notonlybecauseofastructuralshiftinChina'sexportdestinationbutalsoreflectingrobustdomesticeconomicactivityinEMs.

ChinainPictures|YiXiong&DeyunOu|July202412

DeutscheBankResearch

ImpactofUSandEUadditionaltariffislikelyminor

BreakdownofUS’starifflistonChinaby2023importvalue

20

Solarcells

mmNaturalgraphite

USDbnSyringesandneedles

15

10

5

0

ShiptoshorecranesMedicalgloves

Facemasks

mmElectricvehicles

mmPermanentmagnetsBatteryparts

mmSemiconductors

'15'16'17'18'19'20'21'22'23

BreakdownofChinaEVsexports

EU

Latin

Asia

Africa

ChinaexportsofEVs,bnUSD

Others

NorthAmerica

4540353025201510 50

20192020202120222023

Source:DeutscheBankResearch,ChinaCustomSource:DeutscheBankResearch,ChinaCustom

•TheUSimposednew/additionaltariffsonselectedChineseproductssuchasEVs,batteries,andsolarcells.Thesetariffswillonlyimpactabout0.5%ofChina'stotalexports.TheEU’snewtariffsonChineseEVswillaffectaboutanother0.5%ofChina'sexports

•WeestimatethesenewtariffscombinedwillreduceChina'sexportsgrowthbyroughly0.2to0.3pptin2024-25–almostignorablecomparedtothe6%YoYexportsgrowthinQ22024

•AbiggerrisktoChina’sexportsisthattheUSmightimposebroad-basedtariffsonChineseproductsifMr.TrumpwinspresidentialelectioninNovember

ChinainPictures|YiXiong&DeyunOu|July202413

DeutscheBankResearch

Industrialovercapacity?Thedropincapacityutilizationcanalmostbefully

explainedbyafewindustries

Capacityutilizationrate:2023comparedto2016

10

8

6

2023comparedto2016

4

2

0

-2

-4

-6

Petroleum

UniversalandNatural

EquipmentGas

SpecialFerrousExtraction

Metals

Nonferrous

Equipment

ri,suMetalusChemical

AllIndustriesFiber

ChemicalsTextile

PharmaceutiElectricMachineryand…

cals

Computer&Electronics

Food

NonmetallicAutomobile

Mineral

646974798489

Capacityutilizationrate,2023

Source:DeutscheBankResearch,NBS

Capacityutilizationrateby2groups

Capacityutilizationrate

85

80

75

70

65

60

Automobile,electronics,andnonmetal…Otherindustries(avg)

Mar-17Mar-19Mar-21Mar-23

Source:DeutscheBankResearch,NBS

•Capacityutilizationwasunevenacrossindustries.In2023,almosthalfofallindustries’capacityutilizationratewerestillator

abovetheaveragelevelin2017-19.Meanwhile,afewindustries’capacityutilizationratehasdroppedtonearorevenbelowtheaveragelevelin2014-16

•Thedropincapacityutilizationin3industries(computer&electronics,nonmetalminerals,andautomobiles)canalmostfully

explainwhyChina’scapacityutilizationratehasreduced.Outsidethese3industries,industrialcapacityutilizationratehasbeenbroadlystableinrecentyears

ChinainPictures|YiXiong&DeyunOu|July202414

DeutscheBankResearch

RMBOutlook

RMBcontinuestofacedepreciationpressurevstheUSD

Thestrongeconomicheadwindshavesignificantlyshrunk

China’sBoPsurplus,nowatthelowestlevelsinceSep2020

USD/CNYspotis0.1%awayfromthetopofthetradingband

Source:DeutscheBank,BloombergFinanceLPSource:DeutscheBank,CEIC

•SinceJanuary,theRMBhasbeenunderdepreciationpressure,withUSD/CNYnowtradingaroundthetopoftheUSD/CNYtradingband.Asofwriting,theUSD/CNYspotis~0.1%awayfromthetopoftheband.

•TheweaknessisdrivenbyconcernsaroundChina’sgrowthoutlookandaworseningpropertysector.Theseconsequentlyhave

resultedinthenarrowingofChina’sBoPsurplus.AsofMarch,theBoPsurplusisthesmallestsinceSeptember2020.ThelackofanycyclicalreboundshouldleadChina’sBoPbackintodeficitterritoryagain.

ChinainPictures|PerryKojodjojo&HazelLai|July202416

DeutscheBankResearch

Risingprotectionismwouldnotonlyslowitsexportrecoverybutalsofurther

narrowitscurrentaccountsurplus

However,risingtradebarriersrisknarrowingthecurrentaccountfurtherduetothesmalltradesurplus

ThenarrowingofChina’scurrentaccountismainlyduetoawideningoftheserviceandincomedeficit.

Source:DeutscheBank,BloombergFinanceLP,CEICSource:DeutscheBank,CEIC

•China’stradesurplushasconsistentlybeenthelargestcontributortothecurrentaccountsurplus.Infact,overthepastfew

quarters,thetradesurplusisnow30%largerthanthepre-pandemicperiod(2015-2019),dueto:(a)astrongexportrecovery,and(b)theongoingimportsubstitution,asChinalookstoreduceitsdependenceonglobalgoods.

•However,withtheriseinprotectionistsentimentfromboththeDMandEMworld,Chinaexportscouldslow,especiallygivenrisingconcernsoveritsovercapacityissues.Indeed,inrecentmonths,wehaveseentheUS,theEU,Canada,Turkey,LatAm

countriesandIndonesiaintroducingtariffsonChineseimports.

ChinainPictures|PerryKojodjojo&HazelLai|July202417

DeutscheBankResearch

Trump2.0willseethereturnofmorehawkishtradepolicies

AnotherrisktoChinaexportsistheriskofpotentiallyhighertariffsifMrTrumpbecomesthenextUSpresident

Source:DeutscheBank,FinancialTimes,WSJ,NikkeiAsia,BloombergFinanceLP,Reuters(formoredetails,seeourreport,

AsiaThematic

StrategyNotes:USelection&itsimplicationsforAsia

)

ChinainPictures|PerryKojodjojo&HazelLai|July202418

DeutscheBankResearch

Tourismandincomedeficitrecycleonaverage70%ofChinatradesurplus

…anditsincomede