Even Dragons Tire!
Some recent news headline about China should make you worry
- Alibaba more like an economic bellwether for China has revise down its sales outlook
- LVMH, the world's largest purveyor of luxury goods, said in October that sales growth of its Louis Vuitton products in China fell from the high teens to the midteens in the third-quarter from a year ago
- Italian high-end menswear maker Ermenegildo Zegna Group recently told Bloomberg that it will open fewer stores in China next year after observing weaker demand over the past few month
- Aluminium fell near a 15-month low, after data showed China’s manufacturing sector grew at its slowest pace since July 2016 and concerns lingered about excess Chinese supply (anyways there is structural oversupply in the Chinese market)
In China credit growth hasn’t bumped yet, and the GDP grew at its slowest pace since 2016 in 2Q’18. The deceleration will continue as the effects of ongoing tariff war starts to show impact. The retail sales have slowed to single digit growth, and business sentiment in both the manufacturing and non-manufacturing sectors was weaker than expected in October (led by sharp declines in export demand)
The markets are reacting to underlying slowing economy with CSI 300 index down 25% this year, with 8% in “bloody” October alone. The markets have estimated Rmb41tn worth of pledges share outstanding as of mid-October, with state owned financials having a paltry Rmb100bn of firepower to prevent the fire sale. So far, the policy easing is so far focused on reversing macro tightening (from early 2018) rather that rolling out new stimulus
Some of the monetary and fiscal stimulus measures which haven’t been able to shown real impact were:
Cuts to bank reserve requirements (freeing upto $109bn of capital)
Increased fiscal spending (local government bonds are flooding debt markets with Special purpose bonds, earmarked for infrastructure projects – upto $197bn of approved quota). Mainly was done to reduce off budget borrowing through local government financing vehicles (“LGFV’s). Also talks are around to reduce the risk weighting for bank holding of local government bonds from current 20% to zero (without impacting the capital adequacy ratio)
- Injected $74bn into banking system to improve credit flows. Used Medium-term Lending facilities (MLF’s) to provide loan to commercial banks
- Announced tax cuts worth $950 million for corporate investment in research and development
- Proposed cutting the vehicles purchase tax to boost the weakening auto market
- Cuts to value-added and corporate income taxes, and pledge new lending to affiliates that sell default insurance and credit guarantees to support private companies
The eyes are on the upcoming meeting of Trump and Xi at G20 meet in Argentina, which could define the path of 2019