Here are China's New Bet on Stimulus Play

Macro

Greater China Sales Traders

Summary:  China market is at a time where traders are playing by the fiscal stimulus book to gauge the outlook amid weakening economic data. The valuation of Yuan is once again on the center stage as tension escalated between US and China in the form of consecutive rounds of tariff policy.


Monthly Macro Outlook: New signs of stabilization

  • Compared to the previous month, there are new signs of stabilization of the economy popping up here and there, but domestic demand remains weak and headwinds from global trade developments continue to hurt the economy.
  • Our leading indicator of the Chinese economy, credit impulse, which tracks the flow of new credit as % of the economy, is still in contraction at minus 3.8% of GDP. It reflects the impact of the liquidity crunch onshore and regulatory measures taken by the PBOC that especially affect small banks. Most of China’s output indicators are also down, especially electricity generation (-2.7% YoY in July), excepted for the volume of rail freight that is still well-oriented (9.1% YoY in July). For obvious reasons, we don’t expect that the recent improvement in the manufacturing sector will last. New exports orders slightly increased in July, at 46.9, but from a very low level. The dynamics is still negative for small and medium sized enterprises. The bulk of the improvement is related to large-sized companies that can find countermeasures against tariffs and have large market shares aboard.
  • The latest Caixin China August manufacturing PMI rises to 50.4 from 49.9 in July. It’s highest reading since March 2019 and second consecutive month of expansion. On a more positive note, China’s total fixed asset investment growth has been broadly stable in recent months, as state investment offset lower private investment.
Source: Saxo Bank Research & Strategy, Macro Bond
  • On China-US trade front, the tension escalated dramatically near the end of past month. On August 23, Trump raised the existing tariffs on $250B from 25% to 30% due on 1st Oct which coincides with China’s 70th Anniversary while $300B goods would be increased from 10% to 15% on 1st Sep. Trump also called for American companies to leave China. As reaction, the Chinese State Council says it’s slapping tariffs ranging from 5% to 10% on $75 billion U.S. goods in two batches effective on Sept. 1 and Dec. 15. Although two countries tried to ease the tension, the market is quite concerned as seen in elevated USDCNH levels.

USDCNH/CNY Spot: The Eye of Trade War Storm

  • USDCNH/CNY spot had always been the best parameter to gauge the tensions between US-China trade issues. Over the past month, that delta just got dramatically amplified when Trump keeps flip-flopping his narratives back and forth which makes market feel like treading on thin ice and yet comingled with gospel like good news from time to time that drove market into the other end of the extreme.

Time line for tariff drama over the past Month that could explain spot moves:

  • Aug 1: Trump announced 10% tariffs on US$300 billion worth of Chinese imports, in addition to the 25% already levied on US$250 billion worth of Chinese goods.
  • Aug 5: China responded by halting purchases of US agricultural products. USDCNH/CNY rose above 7.0 level. US then intentionally designated China as currency manipulator, which IMF disagreed with a written paper.
  • Aug 13: US and China had a phone call. Trump announced to delay tariffs on about half of tariffs announced on Aug 1 to September. Some tariffs on laptops and cell phones will be introduced on Dec 15 to help holiday sales.
  • Aug 23: China introduced tariff against about US$75 billion worth of US goods, putting as much as an extra 10% on top of existing rates in response to the US tariffs announced on Aug 1. Trump responded to raise all current tariffs from 25% to 30%, and the tariffs scheduled for September and December to 15% instead of 10%.
  • Sept 1: Both China and US imposed additional tariffs on each other. US will kick off a new 15% tariffs on $112 billion worth of Chinese import. On the other hand, China started levying a 5% tariff on U.S. crude oil, the first time U.S oil has been targeted their trade war.
  • From technical analysis perspective, the key levels that really deserve to monitor closely are 7.0, 7.1 and 7.2, as shown in white lines below. Many traders believe these levels will stay effective for coming months.
Source: Saxo Bank
  • What makes this round of depreciation special is that CNH/CNY also weakened against CFETS basket currencies. As shown in the chart below, the RMB CFETS basket index had printed all time low since index inception near 91.
Source: Bloomberg

Another phenomenon that deserves market’s attention is the gap between PBOC’s CNY fixing released 9:15am each morning and average forecast collected by Bloomberg. The deviation amount is once close to year 2015 level where PBOC tried to slow down the tempo of currency deprecation.

Source: Bloomberg
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