Abstract
2018 Article IV Consultation-Press Release; Staff Report; Staff Statement and Statement by the Executive Director for People's Republic of China
1. This statement contains information that has become available since the staff report was circulated. This information does not alter the thrust of the staff appraisal.
2. The US began implementing an additional tariff of 25 percent on US$34 billion of Chinese imports on July 6, with a further US$16 billion identified. China responded by imposing an additional tariff of 25 percent on US$34 billion of imports from the US, with a further US$16 billion identified. On July 10, President Trump ordered the US Trade Representative to begin the process of imposing tariffs of 10 percent on an additional US$200 billion of Chinese imports.
3. Recent data releases are broadly in line with staff projections:
Q2 GDP growth was 6.7 percent (y/y), only marginally lower than 6.8 percent in Q1. Growth was driven by rebalancing: services contributed more to growth than industry (4.0 percentage points vs industry’s 2.5), and consumption more than investment (5.3 percentage points vs investment’s 2.1); net exports remained a slight drag. Nominal GDP growth slowed to 9.8 percent (y/y) in Q2 from 10.2 percent in Q1
High-frequency indicators suggest some weakening in activity in May/June. Industrial value-added slowed to 6.0 percent (y/y) in June from 6.8 percent in May. Infrastructure fixed asset investment growth slowed to around zero. Total social financing growth continued to slow, falling to 9.8 percent in June, driven by shrinking shadow banking. Adjusting for the local government bond swap, total social financing moderated to 10.7 percent (y/y) in June and bank asset growth fell further to 6.8 percent (y/y).
The trade surplus widened in June compared to May, with export growth (in US$ terms) easing moderately to 10 percent (y/y) and import growth falling to 14 percent (y/y). FX reserves increased slightly to US$3,111 billion.
Headline CPI inflation ticked up slightly to 1.9 percent (y/y) in June, with core CPI also stable at 1.9 percent (y/y); PPI inflation picked up to 4.7 percent (y/y).
4. Since the Staff Report was finalized on June 28 the RMB has depreciated 0.6 percent against the CFETS basket and 0.9 percent against the US dollar; the equity market fell 1 percent; the 5-year central government bond yield fell 12bps to 3.3 percent while the 3-month yield fell 64bps to 2.5 percent.