How is China set to tackle headwind for its anniversary mark

Macro

Greater China Sales Traders

Monthly Macro Outlook: Prepared for Lower Growth

The latest data confirm the macroeconomic environment remains challenging for China. China’s credit impulse, which leads the real economy by 9 to 12 months, has improved since Q3 2018, but the inflow of new credit is not stimulating yet the economy on a broad-based level. Domestic demand is still weak, as pointed out by the latest import figures and by the contraction in auto.

Compared with previous quarters, data are slightly improving like newly released Caixin and official manufacturing PMI for September. But the domestic economy is still under severe stress. On the top of that, the export industry is suffering from external headwinds, notably the impact of trade war and lower global growth. The latest new exports orders data are slightly better, including for small and medium companies, but they are still deeply in contraction territory. Industrial production is also sharply decelerating, at 4.4% YoY in August, which will weight negatively on GDP performance in Q3 and Q4 this year.

Decelerating Industrial Production will weight negatively on GDP performance in Q3 and Q4

Source: Saxo Bank, Bloomberg

Stimulus is kicking in well in infrastructure and in the real estate sector, which represents roughly 80% of Chinese people’s wealth. Completed investment in real estate – a key driver of growth – continues to grow more than 10% YoY, which was the case almost all year long. We believe that as long as the real estate sector will stay well-oriented, China will refrain from a massive easing which has been constantly awaited by market participants over the past months. In our view, China is fully aware that a massive credit stimulus program, as was the case in the wake of the global financial crisis, implies high costs for the Chinese economy. Not only it is likely to increase bubbles and misallocation of capital but, in addition, the effectiveness of credit stimulus is questionable: the country needs twice as much units of credit as in 2009 to create one unit of GDP.

Recent comments from PBoC’s officials to foreign counterparts seem to corroborate this view. Chinese officials are getting the market prepared for lower growth, probably below 6% next year. They want to make clear that there is political tolerance for a lower growth level and that it will not be a problem for the economy. At this stage, the market does not seem fully prepared to this shift, so Chinese officials will have to implement appropriate pedagogy in coming months in order to avoid negative investor sentiment

USDCNH/CNY Spot: Fixed into 70th National Day

In the past September, overall USDCNH/CNY spot was contained within 7.0-7.2 range that was formed in August. From technical analysis perspective, the key levels that really deserve to monitor closely are 7.0, 7.1 and 7.2. The daily spot movements were still much driven by US-China trade related headlines, where the messages initiated from Trump administration remain inconsistent over time and divided internally.

US-China trade related headlines over the past month that could explain spot moves:

From tension to ease:

Sep 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.

Sep 10: Trump hinted trade talk with China next week (Sep 19-20, Washington)

Sep 11: Global Times Editor Hu Xijin tweet:

  • China will introduce important measures to ease the negative impact of the trade war.
  • The measures will benefit some companies from both China and the US
  • China exempt 16 types of US exported goods from import tariff

Sep 12: Trump tweeted to delay increased Tariffs on 250 Billion USD worth of goods (25% to 30%), from October 1st to October 15th. Chinese companies considering US farm imports with RFQ.

Sep 20: US officials met with China delegation in Washington with China delegation planned to visit US farm belt, which market read as good gesture.

US reversed to hardened stance and internally conflict:

Sep 21: US Trump Administration sent conflicting message where Mnuchin requested China to cancel farm visit while Trump disagreed with Mnuchin. On the other hand, Trump didn’t accept partial deal to cease the trade war.

Sep 27: Trump Administration is considering ban on Chinese listings in US. Then a US treasury clarified there’s no plan to block China listings for now.

USDCNY fixing in the past month was extremely stable, changing within single-digit pips only most of trading days. The intention from PBOC is clear that they want spot rate stable into 70th National Day.

Source: Saxo Bank, Bloomberg
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