Under China’s lengthening shadow
- China has accounted 30-40% of global growth in recent decades; its slowing is a major drag
- US markets are beginning to see external concerns overtake domestic ones
- The market is second guessing the Fed, pricing in no further hikes in 2019 and perhaps even a cut
- But this narrative is highly premature, in our view
- Thaw in trade wars; low and stable energy prices; China policy stimulus are three possible offsets
A torrid end of 2018 has spilled over to a torrid beginning of 2019. There is no shortage of unresolved matters fuelling uncertainty—US government shutdown, Fed policy, Brexit saga, China slowdown, tech cycle, and oil correction to name a few. But the key issue at this moment for the global economy is the depth of China’s economic malaise. Having accounted for 30-40% of global growth in recent decades, a steadily slowing China imparts a major drag to the world economy in any case. Add to this fears of the decline being disorderly, all other risks pale in comparison.
Apple’s recent guidance on weak demand for its products in China may be the latest straw that’s hurting market sentiments, but local companies have already been lowering guidance in recent quarters. Signs of bottoming out are yet to emerge. High frequency data slid further in December. Caixin Manufacturing PMI fell to 49.7, the lowest since May 2017, indicating contraction. Domestic and external demand related indicators all registered further deterioration. New orders fell for the first time in two and a half years, with companies reporting subdued demand despite some price discounting. Export orders shrank for the ninth consecutive month. Industrial profits also dropped for the first time in almost three years. M2 and credit growth remained close to a multi-decade low. Trade data were weak. Shipments to most regions slowed, reflecting faltering global demand. A plunge in import growth, coupled with cooling factory gate inflation, suggests policy efforts to shore up domestic demand hitherto are falling short. Taken together, our Nowcasting framework is pointing to growth falling below 6% in 1Q.
In response to the sustained economic weakness, the PBoC has recently launched a “targeted” version of its Medium Term Lending Facility (TMLF). Large commercial banks, joint-stock banks and big city commercial banks extending strong support for the real economy on the back of financial prudence will be allowed to apply. Longer term TMLF will be priced 15 basis points below the MLF rates. The move is aimed at lowering funding costs and encourage more lending to illiquid private companies. Taken into the account of time lag, the monetary tactic is unable to reverse course of economic slowdown in the months ahead. We expect three cuts on the reserve requirement ratio alongside cutting reverse repo rate.
At the December’s Central Economic Work Conference (CEWC), top policymakers acknowledged imminent fiscal policy support is around the corner to fend off the perils of a deepening economic downturn. Specific steps include cutting taxes and fees “on a larger scale” than last year to ease shortage of operating capital. Annual quota of special local government bonds will be boosted in order to support infrastructure and utility investments.
The stuttering Chinese economy is having a knock-on effect throughout Asia. Manufacturing PMI for December disappointed from Taiwan to Malaysia. Worsening data could prompt Washington and Beijing to reach a deal sooner. The Trump’s administration agreed to postpone a tariff hike on USD200 bn of imports from China until 1 March as both sides try to strike a deal over issues such as trade barriers and alleged intellectual property theft. It remains to be seen if any concrete steps can be achieved in so short a time.
Taimur Baig and Nathan Chow
Highlights of the week:
• Taiwan faces more risks from weak PMIs than South Korea
• Singapore: Ending 2018 on a low note
• US: A marginally dovish hike
• 2018 - A scorecard (what we got right and what we got wrong)
• DBS Annual Chartbook: 2019 in 64 charts
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