London-Shanghai stock connect latest openness step

CHINA - Report 24 Jun 2019 by FAN Gang and Chunyang Wang

Growth is experiencing downward pressure. Industrial output rose just 5% y/y in May, down 0.4 pps from April, a new low rate. Investment was up 4.4% y/y, down 1.3 pps from April. The fall in investment growth is mainly driven by falling state investment, which in turn was depressed by fiscal deficit pressure. State investment was up 5.6% y/y in May, down 4.2 pps from April. Fiscal revenue fell -2.1% y/y, down 7.4 pps from January-April, further constraining state investment. Real estate cooled further.

Retail sales of social consumption goods were up 8.6% y/y in May in nominal terms. The adjusted growth rate was 7.9% y/y, down 0.4 pps from Q1. Adjusted real consumption was up 5.7% y/y, down 1.2 pps from Q1.

U.S. President Donald Trump’s trade war persists. Even the positive signal of the current negotiations cannot be taken seriously, as Trump enjoys, and has repeatedly played, the uncertainty card. Trade in general was very volatile. In May, the smoothed export growth rate was 5.5% y/y, down 1.2 pps from Q1, and down 4 pps from Q4 2018. The smoothed import growth rate was around 1% y/y, down 8.5 pps from Q4 2019.

After experiencing major drops in April, the main financial indicators were relatively stable in May. At the end of May, M2 was up 8.5% y/y, comparable to April. M1 was up 3.4% y/y, up 0.5 pps from April.

The London-Shanghai stock connect began operating on June 17th. For the first time, foreign companies can list their shares in mainland China. This will allow firms listed in the UK and in mainland China to raise funds via each other’s stock markets. This is a continuation of Chinese efforts toward more financial openness, in line with the easing of restrictions on outflows from China managed by foreign fund managers. Beijing on June 12th, 2018 lifted the monthly cap of 20% on the outflows investors may take out of China via the QFII scheme. More financial openness is consistent with China’s general policy line, in contrast to Trump’s trade protectionism. We expect financial openness to improve China’s capital usage efficiency, and that funds controlled by foreign investors, and especially by professional institutional investors, will flow more into China, rather than the other way around.

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