China's Industrial Production, Fixed Asset Investment Underscore Slowdown

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Includes: EWH, FXI, MCHI
by: Sara Hsu
Summary

China’s National Bureau of Statistics released data on March 14 regarding industrial value added and fixed asset investment.

China’s industrial added value in January and February grew 5.3% year-on-year, which was weaker than the 5.7% gain in December 2018.

China has come to rely on fixed asset investment as a way of boosting GDP, and the recent months show no change in this regard.

There are even more signs from China that the economy is continuing to slow. China’s National Bureau of Statistics released data on March 14 regarding industrial value added and fixed asset investment. China’s industrial added value in January and February grew 5.3% year-on-year, which was weaker than the 5.7% gain in December 2018. China has come to rely on fixed asset investment as a way of boosting GDP, and the recent months show no change in this regard. Fixed asset investment in January and February was 4,844.9 billion yuan, up 6.1% year-on-year.

Industrial production

In terms of industrial production, while industrial value added of industrial enterprises above designated size increased by 5.3% year-on-year, the cement industry faced almost zero growth, and the growth rate of power generation declined to 2.9%. Growth in major non-ferrous metals fell to 6.2%. The mining industry and the electric water heating industry witnessed declining growth, while the growth rate of the electronic equipment and electrical machinery industries were negative. The sluggish auto manufacturing and integrated circuit sectors have created a further drag on industrial production.

In terms of the root causes, slowing year-on-year growth in industrial production can be attributed to inventory adjustment, with falling PMI finished goods inventory, and to employment pressures, as the unemployment rate rose in the first two months of the year and wages of migrant workers are rising.

Fixed asset investment

China has come to depend on using fixed asset investment, as a type of fiscal stimulus, to boost GDP growth. Last year alone, China approved 189 fixed asset investment projects in areas such as energy and transportation. Local governments have become increasingly indebted in order to carry out infrastructure investment, an important part of fixed asset investment

In January and February, infrastructure investment grew overall, both in terms of infrastructure projects with electricity and those without. Railway and highway investment contributed greatly to improvements in infrastructure investment. The boost in this area isn’t necessarily positive, as infrastructure investment has saddled many local governments with excessive debt, and resulted in overambitious construction.

Real estate, as another component of fixed asset investment, had mixed performance. Real estate investment increased by 11.6% year-on-year, while the new construction area declined by 11.2% to 6.0%. Commercial housing sales area amounted to 141.02 million square meters, down 3.6% year-on-year, while real estate development investment was 120.9 billion RMB, up 11.6% year-on-year.

Real estate sales transaction area of commercial housing in medium and large cities improved after the Spring Festival. At the same time, land sales have been cooling down, with falling prices of land transactions in 100 cities. Overall, the sector is expected to cool somewhat, and most cities have a price-to-income ratio of more than. This is extremely high; historically in the United State, this ratio has been about 3-4, meaning that home prices have been three or four times annual income.

The upshot

While some may view the growth in fixed asset investment as a positive sign, in fact it is a sign that China’s economy remains weak, dependent on government-related projects and an overpriced real estate sector. Improvements in industrial production would point to a healthier growth pattern, as suppliers manufacture goods to keep pace with growing demand.

It is hoped that future reports of industrial production will improve. If not, China's growth model will face new trials as the nation continues to rely on the less productive, debt reliant fixed asset investment sector to shore up its economy.

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