China's Industrial Economy 2018 Q2 Report

Abstract

Q2 Business Sentiment Index continued to be in a slight expansion, making the first two quarters of 2018 the first period of expansion in the past four years and since the survey began. Other signs of improvements included a slight expansion in employment, electricity consumption, and overseas orders, as well as a slight improvement in gross margins. The prevalence of overcapacity remains high, though its severity is significantly reduced compared with a year ago. Overall, based on our industrial survey and macro data, the current market pessimism does not arise from the economic fundamentals, but rather is caused by sentiment due to the trade wars, structural problems of Chinese economy and the effort to reduce leverage. The recent proposal of monetary easing to pump up the economy is short-sighted. The vulnerability of the Chinese economy comes from its structural problems including the lack of core technologies in some areas and high level of debt due to persistently loose monetary policies. The current situation calls for a new round of economic reform and institutional building. China still has a number of areas with great potential that, if properly developed, could sustain the country's long term growth. These areas include domestic consumption, technology innovation, urbanization, and reform of state-owned enterprises. We believe the best strategy to insure against external shocks is to enhance the system's internal strength.