Trade war mess left only limited impact within China
Greater China Sales Traders
Summary: Trade war mess left only limited impact within China where stabilization of the economy continues after the latest slew of soft data release. Our trader also has his own view about how these weak numbers will play out and start driving the country’s currency trend going into Q3.
Monthly Macro Outlook: Stabilization Continues amid Trade War Mess
- The macroeconomic outlook in China has not changed much over the past Month. Stabilization of the economy continues but it is not broad-based amid ongoing trade war with US. Q2 GDP print was released at 6.2%, the lowest level in 27 years, however, it’s still more growth than the size of most countries globally! What is probably more interesting is that many sectors have shown strong signs of revival in June, as shown in the chart below, we are seeing solid rebound in retail sales, industry output and fixed-asset investment YoY growth rates and they all beat estimates. Industrial output was up 6.3% YoY, fixed asset investment grew by a solid 5.8% in the first six months of 2019 compared to a year earlier and retail sales up astonishingly 9.8% YoY. Recently released Caixin July Manufacturing PMI also showed recovery to 49.9 from 49.4 in June.
- Looking at June data’s details, if you will realize they are structurally more positive confirming stabilizing signs: for industry output it’s led by railways and ships, metals, machineries, telecommunications and computer; for retail sales it’s led by consumer goods, household appliances and furniture; for fixed-asset investment it’s led by private sectors and SOE eased back.
- On China-US trade front, there’re two notable developments pointing to further escalation in trade tensions. The first one is that Trump unilaterally decided to put additional tariff of 10% on the remaining 300US billion worth of China’s imports and this does not include the current tariffs of 25% imposed on the 250US billion worth of goods. This is against the backdrop of news earlier this week that trade negotiation has been going well in Shanghai and surprised global markets. Trump also threats to raise tariff amount pending agriculture purchase from China while China has asked firms to stop purchasing which has created a deadlock. Secondly, recent RMB depreciation and subsequent US’s labeling China a currency manipulator further. This makes current situation much messier.
USDCNH/CNY Spot: A New Regime above 7
USDCNH/CNY spot has entered a new regime above 7, the significant mental big figure resistance level. There are many implications behind this price action.
- The broken big figure level 7 is a solid step toward a market driven RMB foreign exchange market. The self-enforcing significance of the big figure level 7 is in part due to previous non-market factors kicked in back in 2016 and 2018 like offshore RMB market liquidity squeeze, counter-cyclical factor adjustment and structured reserve requirements of banks’ forward sales to their clients. Market’s belief on is now more balanced and the new equilibrium or regime is going to be formed in the short term around 7.0-7.1. The move is comparable to foreign exchange market reform back on August 11, 2015, short for 8.11 reform where spot market had one-time adjustment from prolonged and suppressed imbalanced.
- The broken big figure level 7 is concrete message from PBOC that they don’t intervene the market. Back on June 7, PBOC president Gang Yi had an interview with Bloomberg (video link) where Yi explicitly expressed that he doesn’t see any special significance for specific numbers. Market at that time also read this as PBOC is comfortable with potential breakout.
- The assertion from US that China is a currency manipulator is groundless, as mentioned by PBOC’s official statement that the conclusion is against US’s own quantitative rules. This is political retaliation which only serves to worsen the current deadlock. If we compare the normalized price changes in dollar index (8%, yellow line), CFETS RMB Basket Index (5%, white line) and CNYUSD (10%, green line) since March 22, 2018 when Trump initiated first round of tariffs on China imports, you will see CNY’s excess depreciation of 2% is quite moderate compared to dollar index and the CFETS RMB Basket Index is relatively stable.