The trade war between China and the US has lasted for over 18 months and this has caused damage. China has suffered, but it is not losing very big yet. In fact, its current account surplus rebounds in 2019 and is on track to hit over $200bn (1.5% GDP) for 2019, defying speculations that the country was about to fall into current account deficit.
China will certainly make verbal condemnations against these bills, but at this moment we don’t think Beijing will take retaliatory actions because it does not want to derail the ongoing trade talks with the Trump Administration, and it understands that the White House can do little to stop Congress. For now, the major obstacle in the talk is still the tariff roll-back requested by Beijing.
The 2019 pollution control plans have mixed targets across regions. The North (Beijing area) is planning more ambitious reductions than last year, while the East Coast (Shanghai area) and Central China are more conservative. This will have different impacts on various raw materials. Steel output growth will slow down further but coal output growth will be more resilient.
Traditional political factions, which used to be important in understanding China’s political dynamics, have been weakened by the anti-corruption campaign and lost their prominence, and other groups are on the rise. Among them, a couple groups of technocrats stand out. They are the rocket scientists and bankers. Some of them are expected to join the 25-people Politburo in the upcoming party congress and become the country’s most powerful leaders.
We don’t share the view that the market is seeing a rate-cut cycle. The PBOC may be able to cut LPR for another 2-3 times by a total of 10-15 bps, and no more. But even that will only bring the total rate reduction to 26-31bps, which equals to one rate cut under the previous system, still with less impact because they only apply to part of new bank loans. This is hardly a “cycle”.
According to CCDI and local commissions for discipline inspection (CDIs) websites, a total of 98 bankers, financiers, and financial regulators have been investigated for corruption in 2019. These included high-profile names such as Liu Shiyu, former securities regulator chairman and Hu Huaibang, former chairman of China Development Bank – the largest policy bank in China. More people are taken down at the provincial level.
We think this time Hong Kong’s economy could get worse than that in 1998 but through a longer period. First, retail sales now account for a greater share of HK GDP today (17%) than 20 years ago (15%), and seems more vulnerable to this domestic instability. When the conflicts escalated in August retails sales shrank by 22.9% yoy, more than the biggest single-month drop in 1998 (21.5%). Hotel occupancy rate also fell to 63% in September, the lowest level on record, as tourists’ visits dropped by 35%. Second, the external environment is unfavorable given the unresolved US-China trade tensions, meaning that it will be difficult for Hong Kong exports to recover, especially if the protests erode Hong Kong’s connection with mainland China.
The room for further monetary easing may be more limited than what the market believes, and it is difficult for interest rates to fall further in China. This is because the economy is likely to set for stabilization or even a mini cyclical rebound after six straight quarters of slowdown, as the outlooks for housing and automobile are quite positive. Also, the economy is not heading for deflation. The decline of PPI year-on-year growth is probably ending while the pork-led CPI inflation is to surge further. Last, the external pressure may also ease slightly if Beijing could strike a truce with Washington.
The Fourth Plenum of the Chinese Communist Party’s 19th Central Committee convened and concluded at the end of October 2019. This plenum gave more indications that President Xi will continue to serve after 2022. Facing a slowing economy and an unpredictable White House, the Party’s leaders pledged to modernize state governance and to carry forward Socialism with Chinese characteristics as China’s ruling ideology. In short, the Party is going to prove that it can reconcile governance dilemmas that other political systems cannot.
