Weak Domestic Demand and Better Credit Pulse

Macro

Greater China Sales Traders

Over the past month, the macroeconomic outlook has barely changed in China. The government’s attempts to re-engineer the economy through both stimulus program and looser credit conditions continue to have a positive impact on the key housing market and on credit impulse.

Our leading indicator for China’s economy, the credit impulse, which tracks the flow of new core credit in % of GDP, is still in contraction but slowly moving upward, at minus 3.8% of GDP according to our latest update. We expect this trend to continue as the inflow of new credit will likely keep increasing in coming months to cope with the consequences of the trade war. In addition, the targeted housing policy continues to positively affect the real estate sector – which represents roughly 80% of Chinese people’s wealth. Completed investment in real estate, a major driver of growth surged 11.2% YTD Y/Y in May and the average price of new homes in 70 major cities monitored by the government rose at their fastest pace in five months in May, at 0.7% from the previous month, and 10.7% on an annual basis. As was the case in previous economic downturns, China’s real estate is a key pillar of the country’s economic stability to mitigate the slowdown.

The bottom line is that domestic demand is still weak. Slowdown in retail sales is similar to that of 2016, when the economy reached a low point, and apparels sales, which are a good proxy of the broad economy in China, are the weakest in 20 years. Further fiscal stimulus, driven to support domestic demand, is likely to be announced in coming months as this is currently the most worrying point of the Chinese economy.

USDCNH Spot: A New Range Lower

The past month in June was quite eventful and can be categorized into two themes: global central banks’ dovishness and China-US meeting at G20.

Regarding central bank, US Federal Reserve delivered enough dovish message by removing the key word “patient” in FOMC statement and market increasingly priced in rate cut expectation around 50bps by end of this year. These directly contributed to dollar index and USDCNH spot lower. The dollar index is also running at trend defining level of 200-day moving average with speculative USD net long position in futures market dropped to four-month low.

Regarding China-US meeting at G20, the overall result is constructive and favorable for risk appetite. Both sides agreed to resume trade talks on basis of equality and mutual respect and showed to each other positive gestures. USDCNH spot gapped lower on this initially but quickly recovered even above previous high. This was much due to profit taking flow and onshore expectation of PBOC rate cut.

In the mid-term, the odds are favoring spot lower for three reasons, albeit with limited room:

  1. Event trading time window after G20 meeting. Previous market worry over escalating tension between China-US can now be relieved.
  2. China yield spread over US keeps widening with 10Y widest since early 2018 around 120 bps. From carry trading’s perspective, Chinese bonds’ yielding advantage amid global low yield environment will attract asset allocation flow and are likely to support CNH/CNY strength.
  3. CNH/CNY lagging broad Asia FX strength, e.g. SGD, TWD and KRW.
Source: Saxo Bank
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