What has happened?
China has signaled a range of stimulus measures, for now focused around tax cuts and increased rebates. There are suggestions that fiscal spending could be increased this year, with the People’s Bank of China also promising to make monetary policy more forward-looking and flexible, and keep liquidity “reasonably ample”. The National Development and Reform Commission (NDRC) has also said that it is targeting a “good start” to 2019, but will strengthen monitoring of the economy and improve its “reserve” of economic policies.
These statements followed some recent data disappointments, most notably on foreign trade, published yesterday. China’s exports showed a decline of -4.4% YoY in December, compared to +3.9% YoY growth in November and consensus expectations of a +2% rise. Imports declined 7.6% YoY in December, compared to growth of +2.9% in November and consensus expectations of +4.5%. In particular, China’s exports to the U.S. declined 3.5% YoY in December, with China’s overall exports of mobile phones dropping by 31.1% YoY.
Asian markets reacted positively to government stimulus statements. Having fallen by 1.4% on January 14 on the release of the weak Chinese export data, Hong Kong’s benchmark Hang Seng Index was up by 2.2% today. Likewise, having fallen by 0.7% yesterday, China’s A-share Shanghai Composite Index rose by 1.4% today. Chinese stimulus news also gave an initial boost to European markets, with trade-sensitive sectors particular gainers.
Recently announced stimulus measures come on the back of recent announcements around cuts to the banks’ reserve requirement ratios (RRR) and the Chinese authorities clearly want to indicate that they will provide extensive economic support.
However, the Chinese economy will continue to face substantial headwinds and it is unrealistic to think that stimulus measures can return GDP growth to previous levels. Higher U.S. trade tariffs are starting to affect China’s exports, particularly electronic products such as mobile phones and electronic integrated circuits, at a time when global demand may anyway be starting to soften. In addition, China’s GDP growth this year could face additional challenges from a cooling property market and weaker private sector sentiment. We expect China’s growth to decelerate from 6.5% in 2018 to 6.0% in 2019 because of the slowdown in both external and domestic economic activities and believe that markets will need to accept this new reality.
On the trade front, we think China has strong incentives to reach a deal with the U.S. this year and think that it may explore ways to purchase more U.S. products, ease access to its financial sector for U.S. companies, keep the CNY more stable and improve property rights protection. We expect some progress in U.S./China trade negotiations in next two months, which would support market sentiment as could further stimulus measures, for example on infrastructure construction.
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