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Shanghai’s economic development in the 1st quarter

May 18, 2017

The Shanghai Municipal Government’s Information Office held a press conference on April 19 on Shanghai’s economic development in the 1st quarter. The following are the highlights:

Ruan Qing, deputy director, Shanghai Development and Reform Commission
Tang Huihao, chief economist, Shanghai Statistics Bureau

Jiemian: I’m with Jiemian.com. Among the economic indicators for the 1st quarter of the year, most of them are up. However, the foreign investment volume has dropped, what are the reasons? Next step what measures do you plan to take to keep the scale and efficiency of foreign investment?

Ruan Qing: The reasons for the drop in foreign investment in two categories this year include:

First of all, foreign investment has been increasing steadily for 17 years in a row in Shanghai, which positioned the contractual foreign investment and actual foreign investment at US$50.98 billion and US$18.51 billion, respectively, by the end of last year. At such a high level, we reached the conclusion that foreign investment in Shanghai will enter a slow lane.

Second is the international economic environment as the global economy lacks momentum with lots of uncertainties. Last year, the global FDI dropped by 10-15 percent and the competition for foreign investment intensified, which is an objective factor.

Third, the drop in the 1st quarter reflects some structural problems. For example, the actual foreign investment in the manufacturing industry dropped 25.3 percent in the quarter, which was caused by cost as well as the transfer of foreign investment from coastal areas to inland areas. Another factor is the actual foreign investment in real estate, which dropped 10.6 percent, and reflected the continued drop of foreign investment in the sector. The significant drop of contractual foreign investment was mainly due to the fluctuation of finance lease. In 2015 the business increased by 2.8 times. However, it dropped pretty much due to the change in foreign exchange, fund costs at home and abroad and the central government’s supervision policy.

Meanwhile the structure of foreign investment in Shanghai is not even though the quality is improving. The foreign investment in lease and business service rose 6.9 percent in the 1st quarter, and that in the information service industry increased by 16.8 percent. And foreign investment in the service sector accounted for a third of the total amount, which is a sign of improvement for the structure of foreign investment.

The number of headquarters of multinational companies in Shanghai rose by 10, 5 of them are Asia-Pacific headquarters. Meanwhile, foreign investment in the China (Shanghai) Pilot Free Trade Zone has developed in good shape. In the 1st quarter the actual foreign investment reached US$1.4 billion, or 43.4 percent higher than the same period last year. So the quantity and quality of foreign investment in Shanghai has improved steadily. According to a report from AmCham recently, 80 percent of all enterprises surveyed expressed confidence in the investment and development environment in Shanghai.

Next, we will keep track of the movement and change of foreign investment, take active measures to stabilize the scale and improve the quality of foreign investment. The main task is to implement the spirit of the State Council on expanding opening up and use of foreign investment, deepening the next-round reform plan for the pilot free trade zone. And we have put forward a series of concrete measures to tackle problems cited by foreign-invested companies. Second, we will continue the practice of “Negative List” for foreign investment in FTZ to push forward the opening up in the areas of modern service and advanced service. Under the guidance of the national policy, we understand that lots of foreign-invested companies have high expectations. Third, we will carry out policies for headquarters of multinational companies according to the regulations in 2017 to attract more headquarters and R&D centers to settle in Shanghai. Fourth, we will strengthen the service and support for foreign-invested enterprises, support districts and development zones to make preferential policies within the legal scope to keep the healthy momentum in Shanghai in attracting foreign investment.

Tang Huihao: I would like to add something here. From the first three months of the year, we can see that the contractual and actual foreign investment have stepped out of the low level seen in last October, and the slow recovery is expected for the second quarter as well. Considering the large scale of foreign investment in the first half of last year, the drop in the first half of this year will be narrower on contractual and actual foreign investment. We believe foreign investment in the second half will be stable and improve with the transparency of interest hike in the US, the stabilization of foreign exchange in the RMB, the weakening of equity structure of foreign investment in Shanghai, and the implementation of opening-up and reform measures on the pilot free trade zone as introduced by director Ruan just now. Thank you.

STV: Just now director Ruan said the GDP rose 6.8 percent year-on-year in the 1st quarter, which is 0.1 percentage point higher than the same time last year. The figure is quite good. What are the main factors supporting the rise in the 1st quarter, what prospects do you think the factors will bring in the next three quarters?

Tang Huihao: There are three factors: one is the rise of industrial products and increasing confidence. The ex-factory price and purchase price have been rising for six consecutive months from the same period last year, and the two have been rising or have stayed even for 13 consecutive months compared to last year. The purchasing manager index of the manufacturing industry has been expanding for 7 months in a row, which indicates the confidence of enterprises has been rising. In addition, the performance of enterprises has been improving. The total profit for industrial enterprises above designated size jumped 40.1 percent for the first two months of the year, which was 36.6 percentage points higher than the same period last year. The industrial added value for the 1st quarter increased a year-on-year 6.0 percent, which was 10.1 percentage points higher than last year. The rate of contribution by industries to GDP was 23.1 percent, 41.2 percentage points higher than last year.

Second, with the rapid rise of investment in infrastructure and real estate, fixed asset investment rose by 10.5 percent in the 1st quarter, or 2.1 percentage points higher than the same period last year. Second, total sales volume and total retail sales of consumer goods was up 11.5 percent and 7.8 percent in the first quarter, which was 3.1 percentage points and 0.7 percentage points higher, respectively. And new consumption models, including commodity+service, online+offline, retail+experience, pushed forward the development of new consumptions and momentum.

Third, the contribution from exports rose by 13.2 percent year-on-year in the 1st quarter, while exports dropped by 5.6 percent in the 1st quarter of 2016 from the same time in 2015. The rise in exports gave strong support to the recovery of Shanghai’s economy.

As Shanghai is implementing the adjustment policy on real estate, according to the requirement of the central government, the sector has had some negative impact on the local economy. The city’s GDP rose 6.8 percent in the 1st quarter, while the national figure is 6.9 percent. I have to stress that we should pay more attention to the structure, quality and efficiency of economic development. In the 1st quarter, Shanghai had made obvious progress on the above mentioned aspects, which laid a solid foundation for the continuous, healthy and stable development of the local economy, which is not easy and should be appreciated.

Eastday.com: I’m from Eastday.com and I would like to ask about the feature of prices in the city and what the future trends are. Will the consumer price keep rising? Has the Municipal Development and Reform Commission given any consideration toward stabilizing the prices?

Ruan Qing: An analysis of the price trend has the following features:

The first feature is that its growth rate falls month by month. The CPI for the first month of this year grew 3.6 percent, which was influenced mainly by the Spring Festival. Then in February the number fell to 1.6 percent while in March it was 1.4 percent. The declining trend is obvious to see.                                                                                                                                           

The second feature is that the factors that caused the price increase came together. Three major factors contributed 85-90 percent of the increase. The first factor is the residential price, which was related to the housing price surge last year. Housing price climbed 3.9 percent in the 1st quarter, accounting for half of the rise in the CPI. The second factor is medical and health preserving price, which is related to the country’s policy of easing on the low-end medicine and consumable items. The third will be the prices of food, non-staple food, cigarettes and alcohol, affecting 0.2 percentage points of the CPI rise.

The third feature, the rise of service price is faster than that of consumer goods. In the first season, service price increased by 3.2 percent, which involves more needs for senior nursing service and housekeeping service. Consumer goods price rose by 1.4 percent.

The fourth is that the growth rate gap between Shanghai and other provinces is closing. Shanghai’s price growth rate last year was the 3.2 percent compared to the national level of 2 percent while for the 1st quarter this year, the rate in Shanghai was 2.2 percent, only 0.8 percentage points higher than the national number of 1.4 percent. We expect the gap to become narrower.

Generally through the trends we can see that housing prices have been slightly down for two months. Medicine and medical service edges up a little following the third round of reform unveiled in February and remain roughly the same compared to last year. As for food prices, warm and moderate weather has ensured a stable supply of vegetables, so the vegetable price has slid 17 percent from the same time last year. Pork price rose a bit and overall the growth rate for non-staple food should be lower than last year. Then of course we will have to see if the vegetable price will be affected by the abnormal climate in the summer or autumn. Overall the price level in Shanghai is stable and mild. The goal we set at the beginning of this year is to connect with the national goal to adjust the price and we should be able to fulfill the goal.

Next we should keep a close eye on the price trend and maintain a stable non-staple food price level. Measures include maintaining the areas of vegetable production, establishing vegetable supply bases in other cities and building better links between production and sales of vegetables. Since last October, we have initiated temporary price subsidy work and improved the linkage system between social aid and security standard and the increase of prices. The system will be started should the CPI growth rate rise more than 3.5 percent. Mainly low-income people will receive the subsidy. So far we have issued subsidies thrice, benefiting about 1 million people with over 30 million yuan involved. Generally the system has worked well.

I would like to use the chance to share with the media that the standing committee of the Shanghai Municipal Government has approved our work plan this year. We will seek steady growth and keep price levels stable. As for the price policy and reform measures, we will continue to carry out the national and municipal policies that have been released. In principle, the government will not launch further price-adjustment policies that will have a major influence on the CPI. We believe we have the conditions to achieve our preliminary goal.

Tang Huihao: I’d like to add something about the PPI. In the 1st quarter, production price and purchase price rose 4.3 percent and 12.8 percent, respectively, with the growth rate expanding 7.4 and 20.8 for each. Until this March, the PPI has risen 6 months in a row since it ceased to fall last October. Several major industries take up a large proportion, including oil processing, coking and nuclear fuel processing, chemical materials and chemical products manufacturing, and ferrous metal smelting and stressing & non-ferrous metal smelting and stressing. Production price has been fluctuating. The four industries had a year-on-year growth of 23.4%, 22.3%, 25.7%, and 14.2%, respectively, pulling up 3.8 percentage points. Other products only experienced a slight growth in production prices. Apart from the four industries we mentioned, PPI has been steady in Shanghai in recent years with month-on-month and year-on-year changes limited within 1 percentage point. In the 1st quarter, the year-on-year PPI growth rates for the months, taking out the four industries, have been gradually expanding from 0.4 percent, 0.5 percent to 0.6 percent.

According to primary estimates the PPI might fall a bit later as metal prices might suffer a mild fall. The market is still in an over-supply situation and there are plenty of iron ore inventories. Price growth for high-priced iron ore will lessen and may even fall. Meanwhile, steel price rise lacks a sustained driving force. For the second reason, petrochemicals will also be adjusted. It is more possible that the trend for crude oil tends to be weakened. As crude oil continues to stand at a high position while crude oil production increases and domestic coal-to-liquid oil increases, the oversupply of crude oil will be more severe. On the other hand, the entry barrier for the chemical industry is rather low and the competition is intense, leading to a situation of general oversupply still. In principal, the rise in PPI will slow down later. Thank you.

China Business News: The city has ensured a strict control on real estate, so there should be a dragging effect on the real estate economy. I noticed that its industrial added value has slid 16.1 percent. I would like to know how influential the dragging effect is. Also the NDRC is actively engaged in designing a lasting mechanism to adjust real estate. What would this mechanism be like in Shanghai? Will it combine local features? Will there be more land supply like Beijing does? Are there any more specifics? With today’s overall statistics, what phase is Shanghai currently at in terms of economy transformation? What are the features in this phase?

Tang Huihao: In the 1st quarter the control over real estate has turned out to be effective with the amount traded shrinking and the price remaining roughly the same. The areas traded fell by 32.6 percent and Shanghai’s real estate industrial added value was down by 16.1 percent, a drag on the municipal economic growth. Thank you.

Ruan Qing: We have been looking into the phase features in Shanghai’s transformation towards economy innovation and this is a good chance to share with you. Looking back at Shanghai’s economic development since the financial crisis in 2008, our economy has been growing well, which is in close connection with our strategy to land on innovation-driven development and economy upgrade. The features can be concluded in four points.

The first: steady economic growth. From the 1990s to the financial crisis in 2008, Shanghai enjoyed double digit pace of economic growth 16 years in a row. After 2008, impacted by the exterior shock and the interior need to transform, Shanghai’s economic growth has been slower than the national speed, apart from 2010, the year that Shanghai held the World Expo and had a double-digit growth. In 2015, Shanghai was able to rival the national level and later in 2016, the number was 6.8 percent, 0.1 point higher than the national rate. This year Shanghai’s GDP growth rate is expected to be around 6.5 percent. The increase in the 1st quarter is better than we expected.

Judging from the growth in key cities in the global economy, the 6.8 percent growth in Shanghai was on the higher side. The steady economy growth has contributed to the steady development in the country as well.

The second feature, a transformed industrial structure. At the beginning of the 11th Five-Year Plan, the service industry in Shanghai was not complete. After two editions of five-year plans, the situation has improved. In the past, the local economy was driven by service and manufacturing, but now the service industry is more powerful in leading economic growth. In 2012, the tertiary industry took up 60 percent of Shanghai’s GDP and in 2016 the proportion exceeded 70 percent for the first time. Revenue income and the employment rate in the tertiary industry also went beyond 70 percent. Core urban functions as well as functions in finance, transport and trade have been improving. The financial market system is rather complete now.

Shanghai is home to nearly 1,300 regional headquarters of international companies and the number is still increasing by 40-50 each year. Amid the structural adjustment, Shanghai has been less dependent on heavy chemical industry and investment from 2010 to 2016. Steel and petrochemical industries’ proportion in the GDP has fallen to 13.9 percent from the 16 percent in 2010.

The third is better-quality profits. Shanghai’s common public budget income has increased by double digits three years in a row with all income taking up 10 percent of the national total. We can see a good phenomenon in tax sources that indicate a change in driving forces. In the past, Shanghai’s major tax sources included cigarettes, petrochemicals, steel and automobiles. In 2013 the four industries took up 16.4 percent but have declined to the current 13.5 percent. Meanwhile, four emerging service industries namely lease and business service, information service, technology service and residential service have gone up to 19.9 percent last year from the 14.8 percent in 2013. Through the change, Shanghai’s fiscal income has been guaranteed with a steady increase, which is also an outcome of the structural adjustment.

As for quality profits, residents’ income has been rising steadily. Last year per capita disposable income in Shanghai reached 50,000 yuan, top among the 31 provinces and cities in the nation. The index of environmental profits in Shanghai, including GDP energy consumption and PM2.5 intensity, has been strictly restricted by the country. Now these can be achieved in advance in the 12th Five-Year Plan.

The fourth: development space is reserved. The Shanghai Municipal Party Committee and the Municipal Government have maintained the bottom line for population, land, environment and urban safety. We have been strictly observing the national policy to control the population in the megacity. The population went up slightly by 44,000 people last year. There was a time when the annual increase in the number of the city’s permanent residents reached 100,000 and even 300,000 in peak time. Now the policies adjusting the population have worked and stabilized the population change. In land use, we stick to the policy of maintaining the total amount, decreasing land supply and making better use of the land stock. Inefficient use of land needs to be cut and the annual decline reached more than 7 square kilometers. Comprehensive environmental treatment has been performed over the past two years with 22.97 million square meters of illegal structures pulled down and 853.33 hectares of illegal use of land erased. We are determined to tide out outdated industrial capacity lumbered with high pollution, high energy consumption and low profit. Since the 12th Five-Year Plan, altogether 5,000 industrial structure adjustments have been made with effective cuts in energy, emission and land use. Safety management in key industries has been carried forward to ensure urban security.

To conclude, Shanghai continues to see the effects of innovation and transformation. These are a result of lasting efforts and they will continue to support the sustained and sound advancement of Shanghai City. This is, to our understanding, the new normal of megacity economic development in Shanghai. Thank you.

Shanghai Radio: The industrial figure for the 1st quarter in Shanghai was quite good, and the overall efficiency was also very impressive. Could you please give us a detailed explanation on the main reason for recovery of industrial production? As now the main structure of the economy is the service industry, does the strong recovery of industrial production have a negative impact on the economic structure?

Tang Huihao: Industrial production in the 1st quarter continued the recovery of the second half of last year with the following characteristics:

Industrial production in the 1st quarter was the best since 2012 with total output value of industrial enterprises above designated size rising by 7.1 percent, while the industrial added value increased by 6.4 percent.

The total output of six key industries rose by 10.5 percent in the 1st quarter, 3.4 percentage points higher than the industries in Shanghai. Among which, the automobile industry continued its strong development since the second half of last year, jumping 18.8 percent in the quarter, followed by 13.3 percent for electronic information product manufacturing. The total value of strategic new manufacturing industry in the quarter saw a gain of 6.5 percent.

From the efficiency point of view, industrial efficiency increased rapidly. In January and February, the main business revenue and profit for industrial enterprises above designated size rose 12.4 percent and 40.1 percent, respectively. And the structural reform of supply-side of industries in the city has been strengthened with active effect and obvious achievement. The cost for every 100 yuan main business incomes is 78.7 yuan, which is 6.21 yuan lower than the national average. In addition, industrial enterprises kept leverage at a low level with an asset-liability ratio of 48.02 percent, which is 8.1 percentage points lower than the national average.

The following are the main reasons for the recovery of industrial manufacturing in the 1st quarter:

First, strong performance of the main industrial sectors pushed the stability and recovery of industries in Shanghai. Apart from tobacco, all the other 10 industries with output of over 20 billion yuan saw an output increase. Among 97 key industrial products, 45 saw an increase in output, which is 46.4 percent of the total, with the recovery of market. The output of SUVs soared by 92.4 percent, and that of MPVs jumped 89.4 percent, the output of industrial robots also rose by 87.5 percent, and that of metallic containers increased by 69.4 percent.

Just now you mentioned that industrial performance was so good, did it have an impact on industrial structure? Actually there is no such thing as absolute standard on the ratio. What we should do is to improve the structure of every industry and sector to optimize and adjust so that the structure becomes better.