ZEW-PwC China Economic Barometer Q2 2015 - German Managers Cautious on Outlook for Chinese Economy

German managers in China remain moderately optimistic about the economy in the second quarter of 2015. Senior executives' ratings of the macroeconomic situation in China have weakened since the previous quarter, but the overall figure remains positive. The aggregate score obtained by adding positive and negative responses has fallen from 12.5 points to 8.5 points. Just under 30 per cent of those surveyed currently rate the situation as good or very good (previous quarter: 36.5 per cent). "The managers are very sceptical about any economic upturn within the next twelve months", comments Dr Oliver Lerbs, economist at ZEW. Quite the opposite - those surveyed now feel that the situation is far more likely to deteriorate than to improve. In the previous quarter, sentiment was still more or less evenly balanced.

Falls in base rate: still no sign of a kick-start

Recently, and for the second time in the last few months, the Chinese Central Bank responded to the lowest growth rates in twenty years by lowering the base interest rates on both loans and deposits by 0.25 points to 5.35 per cent and 2.5 per cent respectively. Currently, however, just 45 per cent of those surveyed are expecting investment to rise in the next few months (previous quarter: 60 per cent). The proportion of managers who believe that foreign direct investment will fall has risen from 50 per cent to over 60 per cent. Expectations regarding interest rates are changing considerably; a large number of those surveyed are now expecting rates to fall further over the coming six months, particularly as inflation expectations have also fallen considerably. Actual inflation is currently still at 1.4 per cent. Salaries, however, are expected to continue to rise.

"A cost/price gap is starting to open up. Falling confidence in China’s economic growth is having a knock-on effect on the business prospects of German companies in China, too", says Jens-Peter Otto, Partner and China expert at PwC. Whereas one year ago 70 per cent of decision-makers were expecting an increase in trading, the figure is barely 45 per cent today. The aggregate score of positive and negative responses is 7.7 points down on the previous quarter at precisely 25 points. At the same time, the overall expectation is that Chinese exports to the rest of the world are about to fall. Exports in January and February 2015 were in fact well down on the figures for the same months in the second half of 2014.

Investment in services and IT industry continuing to grow, construction and steel keep shrinking

In terms of investment per sector, the overwhelming majority of executives are expecting investment by service providers and IT companies to rise over the next six months. These two front runners are now followed by the insurance and banking sectors. Uncertainty over the automotive sector has risen discernibly compared with the previous quarter. Although investment expectations remain positive overall, the range of managers' expectations is wider than in the last survey; while 40 per cent expect investments to increase, just under a third are expecting a drop in investment. In the steel/metallurgy and construction sectors the downwards trend continues despite the falls in interest rates. Around 80 per cent of those surveyed are expecting investment to fall in both sectors. At the same time the managers are expecting higher than average merger activities in both of these industries. For some time now, China has seen real estate prices falling across a broad level.

Operating environment: virtually unchanged on previous quarter

Managers' sentiment on China's regulatory environment remains largely unchanged from the previous quarter. The only signs of a change in sentiment relate to public tenders. Whilst positive and negative responses balanced out last quarter, for the experts the current tendency is to expect a deterioration in the operating environment. This change in sentiment may be connected with the authorities' investigations into foreign companies in China which have been highly visible in media reports over the last few months.

The survey for the ZEW-PwC China Economic Barometer in the 2nd quarter of 2015 was conducted from 3rd to 18th March 2015. Forty-one senior executives from German companies in China took part.

For further information please contact

Dr Oliver Lerbs, Tel: 0621/1235-147, E-mail: lerbs@zew.de

Prof Dr Michael Schroeder, Tel: 0621/1235-140, E-mail: schroeder@zew.de