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1、Strengtheningendogenous driversto support Chinaseconomic upturnAugust 2024In H1,Chinas economy saw steady performance despiteadversity amid a changing external environment.The grossdomestic product(GDP)grew by 5%year-on-year(YOY)1and thefundamentals sustaining Chinas long-term growth remainunchanged

2、.Despite the GDP fluctuation in Q2,Chinas foreign tradesustained upward momentum and the growth rate acceleratedquarter by quarter.The industrial production remained relativelysteady,and the manufacturing sector continued to underpin theinvestment demands.Due to subdued purchasing power andconfidenc

3、e,the overall strength of consumption momentum inQ2 was weaker compared with the same period in previous years.To optimize and expand service offerings,the governmentintroduced new measures in August to encourage localgovernments to explore opportunities in traditional sectors suchas catering,housek

4、eeping and elderly care and promote growthin“life-enhancing consumption”and“new types of consumption”.Chinas economy is now at a critical stage of structuraltransformation and optimization.Insufficient domestic demandappears to be the major challenge,and the foundation foreconomic recovery still nee

5、ds to be consolidated.The ThirdPlenary Session of the 20th CPC Central Committee2highlightedthe importance of enhancing the consistency of macro-policyorientation and advancing reforms in key areas,as well as theneed to mitigate risks related to real estate sector,localgovernment debt and small and

6、medium-sized financialinstitutions in a coordinated manner while maintaining steadyeconomic growth3.Underpinned by the implementation of previous measures,proactive fiscal policies are expected to further boost investmentin H2.A portfolio of policies including large-scale equipmentrenewal and green

7、and low carbon development will continue tosupport the high-end,intelligent and green transformation oftraditional industries,and boost investment in technologytransformation and upgrading.Developing new qualityproductive forces tailored to local conditions is the key toadvance industrial upgrading

8、and sustainable development.Efforts to boost domestic demand will be focused on increasingpeoples income,enhancing purchasing power and willingness oflow and middle-income groups and expanding serviceconsumption.Export growth is possibly to remain resilient in theshort-term,however,given the complic

9、ated internationaleconomic and trade situation,Chinese enterprises in certainsectors need to make an adaptive adjustment to outflowdestinations and export strategy while accelerating theiroverseas production capacity expansion.31.National Bureau of Statistics(NBS),https:/ Third Plenary Session of th

10、e 20th Central Committee of the Communist Party of China3.Xinhua News Agency,http:/ economy maintained a modest expansion in H1,with GDP growing by 5%YOY to RMB61.7 trillion.Q2GDP slowed to 4.7%YOY,amid fluctuations in the manufacturing industry and consumption spending,whileexport has picked up ste

11、am again.4.NBS,https:/ economy saw steady growth in H1 and insufficient domestic demandappears to be the major challenge4Figure 1.The contribution of investment to economic growth strengthened in Q2Source:National Bureau of Statistics(NBS)Percentage point,YOY%The equipment manufacturing sector has b

12、ecomean important engine for profit growth of industrialenterprises.Multiple sectors posted growth in H1thanks to the policy on large-scale equipmentrenewal.In particular,electronic equipmentmanufacturing and automotive sectors grew faster,up 13.3%and 9.8%respectively4.Given the weakerdomestic deman

13、d,the capacity utilization rate ofindustrial enterprises above the designated sizenationwide rose slightly to 74.9%YOY in Q25,withdestocking pressure remains.Looking ahead,the policy on large-scale equipmentrenewal will possibly provide effective support forhigh-end,intelligent and green equipmentma

14、nufacturing sectors including industrial robots andcomputer numerical control machine tools.Meanwhile,enterprises in relevant industries shouldprioritize cultivating and developing new qualityproductive forces to improve the industrial chain andsupply chain system in the fields of batteries,newenerg

15、y vehicles and integrated circuits,and furtheraccelerate the establishment of“dual circulation”development pattern.5.523.403.043.46-0.812.370.373.025.374.634.163.912.191.770.730.080.530.250.703.781.761.971.241.200.631.881.011.071.190.810.950.83-1.26-0.28-1.05-0.97-0.160.770.63(2)02468102021-06 2021-

16、09 2021-12 2022-03 2022-06 2022-09 2022-12 2023-03 2023-06 2023-09 2023-12 2024-03 2024-06Three drivers of GDP growthConsumptionInvestmentNet exports3035404550556065702021-052021-062021-072021-082021-092021-102021-112021-122022-012022-022022-032022-042022-052022-062022-072022-082022-092022-102022-11

17、2022-122023-012023-022023-032023-042023-052023-062023-072023-082023-092023-102023-112023-122024-012024-022024-032024-042024-052024-062024-07PMI*（%）ManufacturingServicesConstructionHigh-tech manufacturing(20)(10)0102030402021-042021-052021-062021-072021-082021-092021-102021-112021-122022-012022-02202

18、2-032022-042022-052022-062022-072022-082022-092022-102022-112022-122023-012023-022023-032023-042023-052023-062023-072023-082023-092023-102023-112023-122024-012024-022024-032024-042024-052024-06Industrial output overall and key segments cumulative YOY growth rate(%)Overall industrial outputManufactur

19、ingAutomotive manufacturingElectrical machinery and equipment manufacturingComputer,communications and other electronic equipment manufacturing5Due to weak domestic demand and marginalslowdown externally,the purchasing managersindex(PMI)of Chinas manufacturing industrystood at 49.4%in July,staying b

20、elow the boom-or-bust line for three consecutive months.In terms ofenterprise size,the PMI of large enterprises was50.5%,up 0.4%compared with the previous month,showing a stabilizing trend,while the PMI ofmedium-sized and small enterprises was 49.4%and46.7%6,down 0.4%and 0.7%respectively comparedwit

21、h the previous month.Industries related to new driving forces maintainedgrowth momentum,but the demand for new ordersin traditional industries faced challenges.In H2,driven by the accelerated economic restructuring,the PMI of high-tech manufacturing sector isexpected to continue to stay in the expan

22、sion rangeand boost supply and demand,however,the ongoingadjustment of the real estate sector and its relevantimpacts still need close attention.6.NBS,https:/ 2.The overall industrial output remained stable but capacity utilization rate needs improvingSource:NBSFigure 3.The downward pressure continu

23、ed due to demand contraction*50%=Being unchanged compared to the previous monthFigure 4.Investment in manufacturing sector stayed resilient while the real estate sector was still the mainchallenge on the economySource:NBS7.NBS,https:/ Council,https:/ slowdown in income growth led to weakerconsumptio

24、n spending.In June,total retail sales ofconsumer goods grew by 2.0%YOY,down 1.7percentage points compared from the previousmonth.Service consumption continued to growfaster than goods,specifically,catering segmentrevenue rose by 5.4%YOY and went up 0.4%monthon month.Despite of the stimulate on trade

25、-in ofconsumer goods,the consumption ofcommunication equipment dropped from 16.6%to2.9%in June,while the consumption of householdappliances experienced the most significantdecrease,down from 12.9%to-7.6%8.To optimize and expand service offerings,the StateCouncil introduced new guidelines to advance

26、high-quality service consumption on 3 August.TitledOpinions on Promoting the High-Quality Development ofService Consumption,the guidelines9encourage localgovernments to explore opportunities in traditionalsectors such as catering,housekeeping,and elderlycare.They also promote growth in“life-enhancin

27、gconsumption”areas like entertainment,tourism,sports,education and residential services,and aim to expand“new types of consumption”,including digital,greenand health services.6Chinas fixed-asset investment grew steadily in H1,up 3.9%YOY,higher than 3.0%growth for the yearof 2023.Specifically,investm

28、ent in manufacturingsector increased by 9.5%YOY,contributing 57.5%to the total investment growth,and investment inhigh-tech industries grew 10.6%YOY7.In H2,morepolicies are likely to be placed to shore up the realestate sector,however,the relevant impact isexpected to be advanced step by step.Whethe

29、r thereal estate market will see strengthened recoverymomentum will depend on the policy pace andintensity,as well as whether expected residentsincome is improved.Moreover,driven by the issuance of ultra-long specialtreasury bonds and local government special bonds,the infrastructure investment will

30、 likely pick up in H2.Policies on large-scale equipment renewal and trade-inof consumer goods will continue to boost thedevelopment of automotive manufacturing sector,andthe investment in technology transformation remainsa spotlight for incremental investment demand.Thisyear,state-owned enterprises

31、are accelerating toexpanding presence in new sectors,especially fordeepening integration of digital intelligence and realeconomy,the investment in advanced manufacturing,energy and electronic information sectors is likely togain speed.(20)(10)010203040506070FAI overall and key segments cumulative YO

32、Y growth rate(%)Overall FAIHi-techOverall manufacturingRailway,waterway and aerospace manufacturingAutomotive manufacturingElectrical machinery and equipment manufacturingReal estateInfrastructure(20)020406080Total retail sales of consumer goods-cumulative YOY growth rate(%)Total retail sales of con

33、sumer goodsOnline retail sales of physical goodsCatering revenue7The upward momentum of foreign trade has beenconsolidated,and the structural optimization hasbeen achieved.In 1H,the total value of Chinasimport and export of goods amounted to RMB21.17trillion,up 6.1%YOY10.High-end,intelligent andenvi

34、ronmentally friendly product segments were themain driver of the growth.Notably,electromechanical products,characterized by theirhigh technical sophistication and added value,constituted nearly 60%of total exports.Furthermore,the YOY growth of private segmentreached 11.2%,representing 55%of the tota

35、lforeign trade11.Currently,the global economy is still under recoverystage,with geopolitical tensions and tradeprotectionism persist.The impact of trade friction,particularly those stemming from increased tariffs,are yet to be fully assessed.Nevertheless,digitallydelivered service trade is emerging

36、as a new driverfor China,thanks to policy support and the domesticindustrial development.Fostering new qualityproductive forces and technological and exploringnew markets are essential to improve the efficiencyand resilience of Chinas supply chain.10.China Customs,http:/ Customs,https:/ 5.The broad

37、consumption recovery remains soft despite solid growth in service sectorSource:NBSFigure 6.Weak household confidence and sluggish income continue to weigh on consumption spending024681012142021-03 2021-06 2021-09 2021-12 2022-03 2022-06 2022-09 2022-12 2023-03 2023-06 2023-09 2023-12 2024-03 2024-06

38、Per capita disposableincome of urban residents cumulative YOY growth rate（%）Source:NBS(20)(10)010203040502021-032021-042021-052021-062021-072021-082021-092021-102021-112021-122022-012022-022022-032022-042022-052022-062022-072022-082022-092022-102022-112022-122023-012023-022023-032023-042023-052023-0

39、62023-072023-082023-092023-102023-112023-122024-012024-022024-032024-042024-052024-06Foreign tradeCumulative YoY growth rate%ExportImport12.MOF，https:/ investment in China is advancing along itstrajectory in high-tech and green industries.TheMinistry of Commerce reports that in H1,the actualuse of f

40、oreign capital reached RMB498.91 billion(approximately US$68.63 billion),reflecting a YOYdecrease of 29.1%.Nevertheless,during the sameperiod,there was the establishment of 26,870 newforeign-invested enterprises across the country,marking a YOY increase of 14.2%.Sector-wise,foreign direct investment

41、(FDI)in the high-techmanufacturing industry has seen a notableacceleration,rising by 2.4 percentage pointscompared to the same period last year.And FDI inthe manufacturing of medical instruments andapparatus,as well as in professional and technicalservices,surged by 87.5%and 43.4%,respectively12.Flu

42、ctuations in Chinas inbound FDI are normal giventhe high baseline in 2023.Meanwhile,its worthnoting that foreign investors are increasinglyfocusing on high-tech sectors and exploringmedium-to long-term opportunities,particularly inadvanced manufacturing and modern serviceindustries,such as artificia

43、l intelligence,healthcareand the digital economy.To further stimulate foreign investment,theResolution of the Central Committee of theCommunist Party of China on Further DeepeningReform Comprehensively to Advance ChineseModernization(hereinafter referred to as the“Resolution”)13explicitly states the

44、 intention to fullyeliminate restrictive measures on foreignparticipation in the manufacturing sector,broadenthe opening of the service industry and facilitate thesystematic expansion of access in thetelecommunications,internet,education,cultureand healthcare sectors.8Figure 7.Chinas foreign trade s

45、hows resilience amid structural optimizationSource:NBSFigure 8.Chinas inbound FDI declined at a faster pace given the high baseline in previous yearSource:MOC(40)(30)(20)(10)0102030050100150200200820092010201120122013201420152016201720182019202020212022202320241-6Inbound FDI,cumulativetotal YOY(US$,

46、billions)(Cumulative total YoY,%)914.A meeting convened in July 2024 by the Political Bureau of the Central Committee of the Communist Party of China，https:/ Bank of China,http:/ to encourage large-scale equipment upgrades and consumer goods trade-ins，https:/ Daily，https:/ serves as a catalyst for s

47、tabilizing growth,facilitating structural adjustmentand mitigating risk14Given the increasingly complex external environment,insufficient domestic demand and divergenttrajectories in recovery,the urgency to stabilizegrowth in the latter half of the year is likely tointensify.Underpinned by the imple

48、mentation ofprevious measures,proactive fiscal policies areexpected to further boost investment in H2.Theintroduction of local government special bonds andultra-long special treasury bonds is expected to bolsterthe intrinsic momentum of economic development,particularly in sectors such as high-tech

49、manufacturing,consumer electronics and semiconductors.Additionally,the alignment of monetary and fiscalpolicies must ensure enhanced liquidity support for thereal economy.Recent adjustments to interest ratepolicies since July15indicate that the central bank isadopting a more counter-cyclical approac

50、h,reinforcingthe seven-day reverse repo rate as a key policy rateanchor,which suggests a significant transformation inChinas monetary policy regulatory framework in thefuture.In H2,the sustainability of industrial growth willdepend on the demand side.Domestically,theadvancement of new quality produc

51、tive forces tailoredto local conditions remains a priority.The impacts ofpolicies such as large-scale equipment renewal andtrade-in of consumer goods have already beenpartially realized and are expected to be furtherreinforced,particularly in sectors such asmanufacturing investment,automobile consum

52、ptionand the enhancement of green equipment16.Whilethere is still a need to improve household consumptionwillingness,the stimulating measures are expected toyield positive results.Service segment is poised to playa crucial role in expanding and upgrading overallconsumption.On the supply side,the dev

53、elopment andnurturing of new consumption drivers,particularly inareas such as tourism,culture,healthcare,elderly care,and domestic services,will see a gradual enhancementthrough the emergence of new forms and models,including intelligence,sharing and Internetconnectivity.Despite trade friction,the o

54、verall exportperformance is expected to remain robust in theshort-term as the product categories affected bythe tariff increase only account a small portion ofChinas total export.Looking ahead,Chineseenterprises in relevant sectors should not onlyexpedite the establishment of overseas productioncapa

55、cities but also adapt their export strategiesflexibly.They should leverage favorable policies,explore the potential of the domestic market,andenhance technological innovation to improve long-term competitiveness.Mitigating risks related to real estate sector,localgovernment debt,and small and medium

56、-sizedfinancial institutions will be the key working taskaddressed by the Third Plenary Session of the 20thCPC Central Committee.Firstly,it is essential tofoster a positive cycle between finance and realestate market by implementing city-specific policiesthat effectively cater to the essential and e

57、nhancedhousing demands.Secondly,the government shouldprogressively ease the burden of debt repayment bydeveloping a comprehensive set of debt resolutionstrategies,which may include the issuance of long-term treasury bonds and special refinancing bonds.Shifting some of the financial responsibilities

58、andexpenditure to the central government,means roomfor more central government leveraging to mitigatethe ongoing deleveraging of local governments andstabilize the aggregate demand.Last but not least,advancing the reform of small and medium-sizedfinancial institutions will significantly enhance thee

59、fficiency of financial resource distribution,withrural segment to play a pivotal role17.EY|Building a better working worldEY exists to build a better working world,helping tocreate long-term value for clients,people andsociety and build trust in the capital markets.EY embraces innovation and adopts

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