3. Four main reasons causing macro data underestimated

3.1 The practice of PPP projects accelerating and growth rate of private investment falling

Since this year, the scale of PPP project keeps expanding, yet accordingly the growth rate of private investment drops evidently, with down to -1.2% in July, which is related to adjustment of principal part of statistic caused by private investment going to PPP projects.

The scale of PPP is huge and its projects speed up. There are 1,331 projects in two batches of PPP projects offered by the National Development and Reform Commission, accounting for RMB3.5 trillion of investment. Besides, 9,285 PPP projects provided by the Ministry of Finance involve RMB10.6 trillion of investment. And the huge amount of investment pushes up the constant rise of practice rate, with 35.1% in March going up to 48.4% in June.

The figure of private investment growth was statistically lowered due to PPP projects which attract widely social capitals, including private enterprises, state-owned enterprises and mixed ownership enterprises. Among them, the private investment entering to the PPP projects wasn’t counted into the statistical data. In H1 2016, the actual investment of PPP projects reached to about RMB1.2 trillion, among which the investment of private enterprises occupied 12%, the investment of mixed ownership enterprises made up 51% (including state-owned enterprise + private enterprise, state-owned enterprise + foreign enterprise, private enterprise + foreign enterprise). And it’s anticipated that the total investment of private enterprises accounted for 45% to 50%. The construction cycle of capital investment usually lasts relatively longer years, thus we correct the estimation by two terms of project implementation---5 years and 10 years. After revised estimation, the data of private investment growth in H1 2016 appeared to be 3.52%-3.60% and 3.17%-3.21%, respectively, which is obviously different from 2.82% released as actual growth rate.

PPP projects lowering the growth rate of private investment

Source: Ministry of Finance, National Development and Reform Commission, Founder Securities

3.2 Liaoning province squeezing the false statistic, lowering state growth rate of fixed-asset investment

The growth rate of social fixed-asset investment falls remarkably in 2016, with the accumulative growth rate up by 8.1% YoY in the first 7 months this year, 0.9 percentage point lower than that in H1 2016, and the growth rate in July up by 3.9% YoY,3.5 percentage points lower than that in June.

To some extent, current data of fixed-asset investment is disturbed by the statistics made by some local governments, such as Liaoning province.

Since the financial crisis in 2008, Liaoning’s fixed-asset investment growth rate even reached to 60% at one point. However, this data began to fall sharply after the inspection team from central government, in 2015, found that the three provinces in northeast China (Liaoning province, Jilin province and Heilongjiang province) made some tricks on statistics. This July, the accumulative growth rate of fixed-asset investment in Liaoning province was -60.70% YoY, 2.6 percentage points lower than that in June.

Stripping out the effect of Liaoning province, there are signs of stability for the fixed-asset investment data this year under the drive of real estate industry and PPP projects. The growth rate of nationwide fixed-asset investment in Q2 2016 (removing the effect of Liaoning province) appeared to be stable, with accumulative growth rate YoY in the first half of 2016 going to 12.20%, 0.13 percentage point more than that in the first 4 months. If Liaoning province is calculated, that figure in June would be 1.5 percentage points lower than that in April, showing a relatively high fluctuation in Q2.

Except Liaoning province, the growth rate of fixed-asset investment in other provinces this year gets rebound to some extent due to the stimulation of fiscal policy. From Feb. to July in 2016, the growth rate of nationwide fixed-asset investment declined by 2.1 percentage points, while that in Liaoning province was as highly as 39 percentage points. In the same period, that figure was up by 2.1 percentage points in Chongqing, up by 0.9 percentage point in Guangdong province, and down by 0.1, 0.2 and 0.6 percentage point in Shandong province, Hubei province and Jiangxi province, respectively, all of which are better than the average state level in growth rate. This, again, proves the stable performance of nationwide fixed-asset investment recently, after eliminating the effect of Liaoning province.

Negative growth of statistic in Liaoning province, lowering state growth rate of fixed-asset investment

Nationwide fixed-asset investment: accumulative comparison YoY

Nationwide (except Liaoning province) fixed-asset investment: accumulative comparison YoY

Liaoning: fixed-asset investment: accumulative comparison YoY (on the right)

Source: Wind, Founder Securities

3.3  Local government bonds issued to replace outstanding debt putting down the data of medium and long term loans for enterprises

Local government bonds issued to replace outstanding debt lower the data of medium and long term loans for enterprises. In July, new loan increment of RMB reached to RMB463.6 billion, RMB1.01 trillion less increase YoY. The finance credit is totally supported by individual housing loans, with the loans for household sector increased by RMB457.5 billion, that for non-financial enterprises and government organizations decreased by RMB2.6 billion.

According to the budget report of ministry of finance, the local government bonds issued to replace outstanding debts due in 2016 reach about RMB5 trillion, much more than RMB3.8 trillion in 2015. Data from ministry of finance showed that up to the end of July, the local government bonds issued this year was RMB3.971 trillion, with new bonds RMB1.0084 trillion and replacement bonds RMB2.9626 trillion. What’s more, the majority of local government replacement bonds were replaced by enterprises’ medium and long term loans, which made the data of enterprises’ medium and long term loans this year distorted and underestimated.

3.4 Consumption in emerging industries exuberating and there are many missing points in statistic

As the increase of per capita income, resident consumption structure keeps advancing. H1 2016 witnessed the continuous progress in such industries as tourism, aviation, entertainment and healthcare, though the whole economy went downward. Notably, the fixed-asset investment of aviation industry enjoyed a rapid growth against the overall trend. However, as these industries just occupy a small proportion of GDP and the statistic approach for service sector is not as good as that for manufacture sector, there exists many missing data in service sector.

Though affected by the downward economy and depreciation of RMB, China’s tourism stayed a favorable growth in H1 2016, with the number of accumulative domestic tour people up by 10.47% YoY, that of accumulative inbound tour people up by 3.8% YoY, and that of accumulative outbound tour people up by 4.3% YoY. Driven by tourism industry, the volume of passengers transport through civil aviation kept high growth, with the growth rate going up by more than 10% YoY since April.

Tourism industry keeping positive growth

Source: National Tourism Administration, Founder Securities

Volume of passengers transport through civil aviation keeping high growth (%)

The volume of passengers transport through civil aviation, monthly figure YoY

Source: Wind, Founder Securities

4. Conclusion: the economy situation appearing to be L-shape, and 5% of growth currently better than 8% of growth in the past

1) The real situation of economy appears to be L-shape.

2) Several proofs for L-shape economy

3) Four major reasons that cause the macro data underestimated

4) L-shape economy makes big influences on stock market, bond market and the commodity price.

5) The government carried out a neutral and prudent monetary policy recently due to sharp rise of real estate prices, de-leverage plan and expectation of raising interest rate by FED.

6) Potential risk: The expectation of raising interest rate by FED is more possible, causing the depreciation of exchange rate, the pressure of capital outflow, and the impact on China’s financial market, particularly, on the real estate industry. And the minor cycle of real estate rise may go to the end due to the policy for restraining asset price bubble as well as the completion of release of stage demand. Besides, the price rebound of coal, iron and steel may bring about the recovery production, thus changing the relation between supply and demand. What’s more, a new round of clearance and regulation might be introduced as PPP get out of control.

*The article is edited and translated by CCM. The original one comes from Laohucaijing.com.

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