China: Trade war and slowdown in disguise
- The market’s benign look on China’s economic outlook differs with our reading of recent economic data. Industrial value-added picked up to 7.2% in the first two months of 2018 but mainly thanks to seasonality reasons while 13 out of 17 industries witnessed value-added contraction. Fixed asset investment climbed to 7.9% after one-year deceleration but the main reason was property investment, stemming from a delayed impact of land sale. The official manufacturing PMI also softened to the lowest point since August 2016, signaling looming growth momentum. Industrial profits reported growth in statistical terms (16.1%YoY and the lowest level in 12 months) but the absolute value actually contracted from last year. The only exciting aspect is consumption and in particular the online shopping and travelling spending which expanded 37% and 12.6% YoY, respectively. CPI surged to 2.9%YoY but a good part of the increase is due to the Lunar calendar effect.
- On the external front, exports maintained double-digit growth in the past few months and even expanded 44.5%YoY in February on a favourable base effect. Imports also surged before the Spring Festival (36.8%YoY in January). However, US protectionist measures cloud the prospects for exports in the future. This is specially the case if Europe follows the US by imposing trade barriers against China.
- The PBoC responded to the FED hike cautiously with a 5bps up in OMO and SLF rates. Still, we expect the PBoC to remain cautious in its monetary stance as shown in the recent speech of the PBoC’s new governor, Yi Gang. The beginning of the new year witnessed a rapid appreciation of the RMB against the greenback and the USDCNY reached 6.25 on Mar 27. RMB appreciation seems to have become a tool for China to try to accommodate the US requests in terms of a smaller bilateral trade deficit with China.
- Finally, leverage continues to mount although at a slower rate. Still, we do not expect the high leverage to endanger China’s growth in the short term so that the China’s leadership’s 6.5% growth target for 2018 should be achieved. However, with a narrow fiscal space (the target for fiscal deficit is set ambitiously at 2.6% of GDP in 2018) and structural problems dragging down potential growth, further slowdown in the long run is unavoidable.
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FX Advisory, Sales & Trading at Bank of Singapore
6 年I found the February 2018 export yoy growth of double digit up to 44% is reminiscent to February 2015.... With RMB strength seen lately, im quite interested to see how the strong RMB may affect exports negatively to a point where PBOC may need to forcefully devalue RMB like they did back in 2015 to stay competitive and to make sure trade balance doesnt become a problem for China’s leadership to meet its 6.5% gdp growth target...
Economic and Financial Research on Emerging Markets
6 年The true level of leverage is higher and its impact is underappreciated
Postdoctoral Researcher, Journalist, Lecturer, Spanish Translator and Interpreter
6 年Well, if a 6.5% GDP rate of growth is "slow", I am Elisabeth, the Queen of England, with her horrible yellow Ascot hat. I am not sure they will make it letting the Yuan appreciate, as you well know it is ten times more complex than that.