China: Trade talks surprises but not trade data
- The mini China-US trade deal has forestalled the US tariff increase on October 15
- However, don’t expect any quick recovery in China’s weak trade performance
- China’s GDP will slow to 6.0% in 3Q19 from 6.2% in 2Q19
- Pro-growth policies will add downward pressure on interest rates and keep the CNY weak
The outlook for the external sector has remained cloudy. The new export orders PMI contracted for the 16th straight month in September albeit an improved reading of 48.2 vs 47.2 in August. Last week’s trade talks with the US were positive and delayed the US tariff increase scheduled for October 15. Without a comprehensive trade deal with the US, the other planned US tariff increase on December 15 was left intact. China’s trade surplus with the US has stayed large at USD25.9bn in September on slumping imports (-15.7%) and will continue to fuel trade tensions.
The EU, meanwhile, has imposed tariffs as high as 66.4% on steel wheels from China on alleged dumping practices. Although base metals account for less than 5% of China’s exports to the EU, the potential tariffs on intermediate goods will likely hurt exporters’ revenue ahead. The PMIs of major trading partners also fell, for example, to 45.7 from 47.0 for the Eurozone, and to 48.9 from 49.9 for Japan.
Imports slid further to 8.5% YoY in September from -5.6% in August. Imports from South Korea and Taiwan, the global electronics suppliers, fell noticeably by 27.0% and 7.7% respectively. This was in line with the lingering decline in intermediate goods imports. These trends may continue longer term from supply chain relocation to ASEAN. For example, US imports that used to come from China are now sourced from Vietnam. Foreign direct investment from Hong Kong and China to Vietnam surged 107.3% YoY Ytd and 269.4% in September respectively.
Raw material imports picked up somewhat except copper. Import volumes growth picked up to 20.5% from 14.9% for coal, to 10.8% from 9.9% for oil, and to 7.8% from 7.3% for gas. Demand for iron ore recovered in tandem with faster infrastructure investment growth to 4.2% in August from 3.8% July.
On consumables imports, inward food shipments expanded rapidly. In September, the volume of imported pork posted triple-digit growth (162.1%) for a fourth straight month. In fact, pig stock already dropped 41.1% in September. Shortage of pork and other meats (through substitution effect) adds upward pressure to food imports. Beef imports also jumped by 151.3%. Chicken and lamb all recorded double-digit growth for over six months. The double-digit declines in the import volume of soybeans has started turn positive at +2.3 % in September. China has, in last week’s mini trade agreement, agreed to purchase USD40-50bn of US agricultural products annually. Against external headwinds and softening domestic demand, we expect the 3Q19 GDP release this week to show growth falling from 6.2% in 2Q19 to 6.0%.
Look for the central government to initiate more pro-growth policies ahead.
On the fiscal front, increments of project approvals and local government bond issuance in recent months should translate into more infrastructure spending ahead. As of September, local governments bonds issuance increased 10.1% YoY and used up more than 90% of their new debt quotas for 2019. An early assessment on the 2020’s quota is already in progress.
On the monetary front, the cut in banks’ reserve requirement ratio (RRR) last month should increase liquidity and lower the average lending rate (held stable at 5.66% for Q2 2019; 5.69% for Q1 2019; 5.64% for Q4 2018). The upcoming two RRR cuts for city commercial banks on October 15 and November 15 should help unclog the funding channels of SMEs, especially those in need of liquidity amidst the ongoing trade war. We expect the PBoC to lower RRR by another 50-100bps in 4Q (see “China: More easing in the pipeline”, September 9).
As such, there should be downward pressure on the CNY exchange rates despite the rebound seen after the latest trade talk. The CNY depreciated by 13% since the start of trade war in early 2018.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422