China update

6 July 2020

Economy

The IMF has predicted that China’s economy will grow 1% in 2020, a downgrade of its April forecast but better than other major economies such as the US and EU, which are tipped to contract by 8% and 10.2% respectively. The IMF World Economic Outlook Update released last week also estimated China’s growth would rebound to 8.2% in 2021 – the highest predicted growth rate for any country. The report pointed to better than expected industrial activity results for China in May as a key factor in the comparatively upbeat forecast, despite investment and the retail sector remaining weak.

Industrial profits grew year-on-year by 6.0% in May. The National Bureau of Statistics cited easing inflationary pressures on input costs and improved ex-factory prices as drivers. The reversal – the previous month saw a decline of 4.3% – is consistent with the two-speed recovery of China’s economy. Demand remains soft but improving, with retail sales down 2.8% during the same month.

China last week announced changes to foreign investment regulations. When the reforms come into effect from 23 July 2020, limits on equity stakes in securities, funds management, futures and life insurance companies will be removed, allowing 100% ownership by foreign entities. The reforms also formalise the removal of restrictions on foreign investment in commercial vehicle manufacturing. China also announced it would relax foreign investment restrictions for vocational education and health services within designated free trade zones. 

Consumer behaviour

Over the course of the 18-day promotion China’s mid-year shopping festival 6.18, customer engagement in Tier 3 cities doubled compared to last year’s numbers from JD.com and Alibaba. Sales of so-called “3C products”, which include computers, communication devices, and consumer electronics in lower-tiered cities overtook those in Tier 1 and Tier 2 locations. The shopping festival also revealed a change in consumer demographic, with a 22% increase in participation in the over 40s category. This supports the more general increase in activity by an older demographic on e-commerce platforms as a result of COVID-19. The most popular categories in live-streaming sales were skincare and cosmetics, apparel and 3C products, which accounted for almost 70% of the total sales volume.

A new feature of this year’s 6.18 was an interactive game “Ideal Life Express” released by Alibaba aimed at stimulating interest in and supporting growth for the agriculture sector. Participating players can earn digital coins by browsing a merchant’s store or inviting their friends to play. The game was played over 400 million times and contributed to RMB 1 billion (A$200 million) in sales of agricultural produce and food.

Fake sales or “brushing” as it is known, is the art of creating fake or “designer” sales and positive reviews on e-commerce platforms to bolster sales. Algorithms for platforms such as Taobao, Tmall or JD.com will favour listings that are moving a lot of product and getting positive reviews. China's tax authorities are using data to identify sales volumes. Last month, authorities sent alerts to merchants warning them of the risks around unpaid taxes on sales, as a disincentive to inflate sales by cancelling transactions after a promotion event had concluded. 

The May Day (1–3 May) Holiday Consumer Trend Report by Tmall has been released. The most popular imported products were from Japan, Korea, US, Australia and Thailand, which have historically also been the most popular overseas destinations for Chinese tourists. The report supports Australia holding position in the top five “most popular”.

Agribusiness and food

The China Meat Association (CMA) reports that, during Q1 2020, China domestically processed 10.38 million tons of pork, a 29% decrease year-on-year. Its swine stock was 321 million head, down 14% year-on-year. The drop in pork output and swine stock was mainly attributed to the twin challenges of the outbreak of COVID-19 and African swine fever. 

On the flip side, China imported 3.04 million tons of meat products, up 82% and valued at A$16 billion, up 150%, year-on-year January to April 2020. Total meat imports included 1.35 million tons of pork (70% increase), 680,000 tons of beef (54% increase) and 136,000 tons of mutton and lamb (3% decrease) year-on-year. The US, Spain and Germany are the top three exporters of pork to China. Brazil, Argentina and Australia are the top three exporters of beef to China. New Zealand, Australia and Uruguay are the top three exporters of mutton and lamb to China.

China’s imports of sheep meat are likely to be flat in the coming months as consumption traditionally goes up during the winter and early spring seasons. The recent outbreak of COVID-19 in Beijing’s Xinfadi Agriculture Produce Wholesale Market has also impacted imported fresh products, with new inspection requirements in place.

China is embracing plant-based protein, with companies from the US, such as Beyond Meat and Impossible Foods, leading in the “looks like meat but isn’t” sector and Oatly, Vitasoy and Milk Lab (Freedom Foods) providing a range of plant-based milk substitutes such as oat, almond and rice. It’s hard to know how Chinese consumers are going to respond to meat that’s not really meat but plant-based milk has shown a strong upward trajectory. According to Euromonitor, the value of plant-based milk in China reached RMB 53.69 billion (A$10.74 billion) in 2019 with a projected compound growth rate of 2.7% per year from 2019 to 2024. Growing consumption of plant-based milk accords with growing general interest in wellbeing and high numbers of lactose intolerance. 

Health

China’s complementary medicines market continues to grow strongly as health-conscious consumers drive demand, particularly for immune-boosting products. Australia is China’s largest source market, surpassing the US in 2019 with imports worth US$1.12 billion. 

Resources and energy

Wood Mackenzie’s June report on China’s long-term LNG outlook shows that China’s LNG imports grew by 12% year-on-year to 60.3Mt in 2019. Gas demand will benefit from tougher environmental standards (although whether these last beyond COVID-19 is another question), fewer gas supply constraints and increased user affordability. It forecasts China’s gas demand to double in 2035 and reach 665 bcm in 2040. China’s LNG demand is forecast to reach 62.5Mt in 2020 and annual growth is expected to average 5.5% to 2030 and 1.6% to 2040, with total LNG demand reaching 106 Mt and 124 Mt respectively. Australia has replaced Qatar as the primary source of LNG into China.

Population

A think-tank affiliated with China’s State Council has again called on Beijing to overhaul the country’s pension system, boost productivity in China’s aged care sector and scrap remaining family planning measures to deal with the growing challenges of China’s ageing society. The latest report from the China Development Research Foundation found that 22.3% of China’s population – 315 million people – would be aged over 65 by 2035, up from 12.6% of the population in 2019. China’s working age population is also expected to decline from 70.4% of the total population in 2019 to 63.9% in 2035.

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