background image background image background image

China’s stimulus is kicking in, but it's too soon to call victory

Macro 5 minutes to read
CD
Christopher Dembik

Head of Macro Analysis

Summary:  We've got green shoots of economic recovery in China but it would be premature to translate this into immediate success for China's multi-faceted stimulus programme.


Today’s Credit Impulse update focuses on China and the latest PMI factory activity print that was released yesterday. There is some seasonality in there but, as a matter of fact, it showed the best delta to the upside since 2009, at 50.5 in March. Such a strong rebound was a surprise and was widely interpreted as a sign that China’s recovery is much faster than the consensus expected. I don’t share this view. 

Let me elaborate. I am not saying that this data is unimportant, but looking at other indicators that were published the same day, it seems like we are still far from stabilisation:

South Korea exports were at minus 8.2% YoY in March, and exports to China at minus 15.5% YoY
– Japan Tankan March sentiment of larger manufacturers is at a 6-year low 
– Germany manufacturing PMI was at its lowest level since July 2012 at 44.1 last month

What is even worse, February machine tool exports from Japan to China fell 50%.

And today, March global manufacturing PMI output reached a 33-month low at 50.5, suggesting that global production growth will keep weakening in the coming months. 

Domestic Chinese data also confirm that the slowdown is not over. I have listed below some of the main fiscal measures undertaken recently by the authorities. The amounts are converted from CNY to EUR for better understanding of the extent of the stimulus. Along with monetary stimulus, the measures are starting to bring some support, as shown by the acceleration of investment growth momentum, but it is still not fully convincing looking at retail sales growth (even excluding autos). Overall, Q2 economic activity is likely to be soft again.

Fiscal measures to support the economy

– Increase in spending of 6.5% in the 2019 budget
– Decrease of the two VAT thresholds, respectively from 16% to 13% and from 10% to 9%
– Lower taxes for SMEs and start-ups
– Public security expenditure of around €23bn in 2019
– Investments in the railway sector for €105bn
– Investments in road and river networks for €236bn
– Purchase subsidies for EV to support the automotive market
– Decrease by 16% of the social security costs paid by companies
– Higher budget deficit for Chinese provinces to €122bn vs €13bn last year
– Bond issuance target by Chinese provinces at €282bn vs €177bn in 2018

What do LEI say?

China LEI are still broadly weak. Output indicators are oriented south, especially traffic freight, while electricity production is stabilising. In the credit space, we have more signs that the fiscal and monetary pulse is working. M1 growth has started to accelerate, at 2% YoY in February, and TSF growth has slightly moderated the same month but it reflected a normalisation after a strong increase in January.
 
China is a much more complicated economy than most people realise. I recently debated with a colleague from Société Générale as part of our “Gateaway to China” roadshow, and she said that China cannot be viewed as one country, like France or Germany. I agree with her. Even a large fiscal and monetary stimulus takes time to work and may have unexpected consequences due to regional differences. 

Market participants are certainly too confident that China is already back on its feet, which will lead to global stabilisation. There is little doubt that China’s stimulus is kicking in, but it will take time to have a strong macroeconomic impact at the domestic and international level.

In the chart below I've plotted the Saxo Credit Impulse and the China Economic Surprise Index. Our credit impulse model focuses on a narrow definition of credit. It includes credit to non-financial sectors provided by domestic banks, all other sectors of the economy and non-residents and only covers the core debt (loans, debt securities, currency and deposits). We use Chinese but also BIS credit data.

Our indicator tends to lead the real economy by 9 to 12 months. As you can see, we should expect more pain ahead as there is a high probability that Chinese data will continue to disappoint in the coming months and maybe up to the end of the summer if our model is correct. Economic stabilisation in China will occur but our view is that it will be only in H2 2019.
To sum up:

The latest China’s PMI factory print was a positive sign that we cannot ignore, but one point does not a trend make.

We need to be patient for fiscal and monetary pulses to deliver. China’s economic stabilisation should happen in H2 2019. In the interim, market participants, who are too confident in my view, need to be ready to face more disappointing Chinese data.

As we know quite well, China’s pulse transmission to EM and DM countries works with a lag between 6 to 9 months, which means that there will be a bunch of ugly European data in coming months and greater market pressure on the European Central Bank to stimulate the economy.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.