China Economy-Survey indicates sound economy

China Economy-Survey indicates sound economy

Event：
PBOC announced 2Q entrepreneur survey results yesterday. Conclusions are as follows: 1) Macro-economic heat index continues to fall with more effective macro-regulation and control. 2) Entrepreneurs feel the pinch of the tight monetary policy with loan control index hitting a record low. 3) The supply of energy, power and raw materials turns good in 2Q, but is still at a lower level in recent two years. 4) Sales prices of energy and some raw materials enjoy a relatively fast growth, exacerbating inflationary pressure. 5) There has been stronger market demand for products, more coming from domestic demand. The situation for export has become better, but orders are lower than the level of the previous two years. 6) Enterprise profitability index is lower than the past two years and payment ability has been reduced. The survey shows that the profitability index of this quarter is 10.9%, though up 0.7 pct points from the last quarter, down 6.6 pct points and 1 pct points compared to the same period of 06 and 07. 7) Fixed asset investment continues to maintain at a high level with great enthusiasm for some heavy industry. The survey shows that 2Q fixed asset investment index is the highest since 94, up 3 pct points from the last quarter.

Comment:
 Stronger domestic demand, improved external demand and saturated orders indicate the general situation of the economy is sound.
 Great enthusiasm for fixed asset investment in heavy industry shows that enterprises are still optimistic about the future economic growth and there is a strong momentum for the economic growth. This well matches with our consistent views that before the mature stage of industrialization process is completed, investment and rapid economic growth will enjoy strong sustainability.
 Given the strong demand, we believe that enterprises are able to shift the pressure of rising raw materials through price. We hold that it is demand, not supply that determines enterprise profitability.
 Although the enterprise profitability index is lower than that of the same period last year, the improvement compared to 1Q might have a positive effect on market expectation.