Back in April, Beijing reported that the Chinese economy expanded 6.4% YoY in the first quarter, surprising markets which had expected a slowdown.
At the time, the US and China seemed to be on the verge of concluding a trade deal and investors were beginning to buy into a nascent cyclical reflation story. China’s better-than-expected GDP number (along with an upbeat read on March activity delivered on the same day) helped make the case that things had inflected for the better.
Three weeks later, on May 5, Donald Trump tweeted that the US would be raising the tariff rate on the $200 billion in Chinese goods that had been subject to 10% levies since September 24. The rest is history. May was an abysmal month for equities, and things only turned around after Trump’s threat to slap Mexico with tariffs essentially cemented the case for Fed cuts.
Fast forward to July and the global economy has continued to stumble towards a deep manufacturing slump. The latest data out of China hasn’t been inspiring.
On Monday, we got a raft of key data out of Beijing, including the hotly-anticipated read on Q2 GDP, which printed 6.2%, the lowest in nearly three decades, but still in line with consensus and well within the Party’s target range for this year.
The rest of the data out Monday beat handily – at the least on the headlines. June industrial production rose 6.3% YoY, well ahead of consensus (5.2%) and besting even the highest estimate from more than three-dozen economists. June retail sales printed 9.8%, which, like IP, was ahead of the most optimistic projections and beat consensus (8.5%) handily. January-June fixed asset investment printed +5.8% YoY, better than the 5.5% the market was looking for.
On a first read, this looks like it could be good news for Chinese equities, which are coming off their worst week since the trade war kicked up again. That said, mainland shares have shown a tendency to get caught in the same “good news is bad news” dynamic that’s gripped US stocks of late. It’s at least possible that the better-than-expected data will damp stimulus hopes and thereby weigh on A-shares at a time when liquidity jitters tied to the launch of the new tech board are already taking a toll.
At the very least (and to the extent we can all take the data that comes out of Beijing at face value), the Q2 GDP print and June’s activity data will help allay fears that the Chinese economy is on the verge of falling off a cliff or otherwise buckling completely under pressure from Trump.
On the downside, that resiliency could give Beijing incentive to dig in, just as the strong data out of the US might similarly incentivize the Trump administration to adopt a harder line.
Although talks between the world’s two largest economies are due to restart after Trump and Xi struck another tentative truce at the G20 in Osaka, there is no timeline for removing the existing tariffs and Trump last week lambasted Beijing for not moving fast enough to make good on a commitment to buy US farm products as a goodwill gesture. (China says no such agreement was reached.)
Analysts are less than sanguine. “Despite the positive G20 truce, we think trade uncertainties will remain elevated, as evidenced by new reports of the tech supply chain being moved out of China”, Barclays wrote earlier this month, adding that “the latest official manufacturing PMI in June (before the G20) remained weak, and the moderation in some major components (including new orders, new export orders, production and employment) suggests continued weak business sentiment and growth momentum amid trade uncertainties”.
(Barclays)
The bottom line, from Barclays, is that “until the outlook for the trade war is clearer, we do not expect manufacturing confidence to recover significantly”.
BofA is similarly cautious. “Even without a further escalation of tariffs, China’s exports will likely continue to weaken in 3Q, as the second tranche of US$200bn Chinese imports–the increase from 10% to 25% on 15 June–works its way into the trade data”, the bank wrote Friday, adding that “in addition to the direct impact on exports, the trade war will also weigh on investment momentum, especially for the manufacturing sector”. For the bank’s Helen Qiao, the positive impact of the VAT reduction isn’t showing up fast enough. Meanwhile, capex plans are being delayed and “some multinational firms are reportedly moving at least part of their production capacity out of China as they hedge against further trade frictions and threats to tech supply chain risks”, BofA cautions. The bank sees growth staying “trapped” trending downward in the back half of the year thanks to lackluster external demand. Qiao’s GDP growth forecast is 6.0% for H2 and for 2020.
Of course, the more disconcerting the picture, the stronger the argument for more policy easing and, indeed, multiple desks now see benchmark cuts from China as the most likely scenario. That’s in contrast to the more targeted measures the PBoC has rolled out in somewhat piecemeal fashion since the onset of the trade war.
It’s by no means clear whether an all-out monetary easing push from Beijing can be counted on to shore up the domestic economy in a worst-case trade war scenario, let alone rescue the global cycle. What’s needed is a kitchen-sink-style stimulus push from Beijing that includes fiscal and monetary measures. That’s the reflation Holy Gail market participants have been searching for over the last six months. With developed market policymakers hamstrung in their capacity to reflate, it seems increasingly likely that it will be left to China to provide the circuit breaker in the event protectionism continues to upend supply chains and undercut decades of progress on trade openness to the detriment of global commerce.
Seen in that light, perhaps the slowest pace of growth for the Chinese economy in more than a quarter century is just what the doctor ordered. There’s always a silver lining, we suppose.
