China Economic Quarterly Q2 2018

Despite the complicated environment both at home and abroad, China’s Q2 GDP has not disappointed the market

The China Economic Quarterly is a market outlook prepared by PwC China and Hong Kong on a quarterly basis to share the latest economic and policy updates. This issue provides an overview of the macroeconomic trends in Q2 2018, and policy insights based on China’s further opening-up to foreign investment, the country’s proactive fiscal policy and prudent monetary policy, as well as an in-depth analysis on the outlook of the renminbi (RMB) exchange rate in the second half of 2018. 

Major economic indicators

Quarterly GDP values and quarterly and annual GDP growth rate

Here are some highlights of the Q2 updates:

  • China’s GDP growth has increased 6.7% year-on-year, and total GDP reached 41.90 trillion yuan for the first half of the year. 
  • Services continued to play a leading role in driving China’s economic growth, with an impressive growth rate of 7.6% year-on-year.
  • Fixed asset investment reached 29.73 trillion renminbi, increasing 6.0% year-on-year in the first half year, 1.6% less than in the previous quarter.
  • Despite macro controls and policy tightening across the country, property prices continue to rise. Total floor space sold rose 3.3% and the sales value of commercial buildings increased 13.2%.
  • Total imports and exports reached 14.12 trillion yuan, increasing by 7.9% over the same period in 2017.
  • As the first round of tariffs was imposed in early July, the escalating trade dispute between China and the US has yet to affect the overall China trade situation.

China’s quarterly policy updates

China is opening up more sectors for foreign investment, particularly financial services and automobiles

China’s National Development and Reform Commission (NDRC) and the Ministry of Commerce jointly released the latest shortened negative list for foreign investment at the end of June. Under the negative list-based approach, foreign investment in the fields not subject to the negative list, will be administered by ‘filing for record’ management. The number of items on the new negative list were cut from 63 to 48, and 22 sectors including financial services, transportation, professional services, infrastructure, energy, resources, and agriculture are now either more or fully open to foreign investment.

China’s proactive fiscal policy and prudent monetary policy will be more forward-looking, flexible and effective

On 31 July, China’s top leaders said fiscal policy needs to play a more effective role in boosting domestic demand and structural re-adjustment, and monetary policy needs to keep liquidity at a reasonable and ample level.

Other economic policies that have been emphasised include:

  • deepening supply-side structural reform,
  • cutting excess production capacity,
  • improving infrastructure,
  • lowering the cost and expenses of enterprises,
  • continuing to reduce the leverage ratio but cautiously watching the level and speed of adjustment,
  • rolling out of major effective reform measures,
  • firm curbs to the rise of housing prices.

Hot topic analysis

The outlook of renminbi (RMB) exchange rate in the second half of 2018

The renminbi (RMB) exchange rate against the US dollar (USD) has declined sharply since mid-June due to factors such as the interest rate hike by the US Federal Reserve, the strong USD Index, China-US trade friction and the volatility of the Chinese stock market. If the US government collects additional tariffs on US$200 billion worth of Chinese products and if China retaliates to a greater degree, the exchange rate may fluctuate even more.

Our expectation is that the frequent two-way fluctuation of RMB exchange rates against the currencies of key developed economies, including the USD, will become more regular, and the China-US trade friction will also evolve into an important breaking point that can test the market-based RMB exchange rate formation mechanism in the medium and long run. 

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Frank Lyn
China and Hong Kong Markets Leader
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Elton Huang
China Central Markets Leader and China and Hong Kong Entrepreneurial and Private Business Co-Leader, PwC China
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Elton Yeung
Strategy and Innovation Leader, PwC China and Hong Kong
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