Facing strong growth headwinds, Beijing will likely maintain its policy easing bias for some time yet. We believe this scenario is positive for bonds in the short term, but weak GDP growth looks set to limit equity performance until signs of solid economic stabilisation or recovery in China emerge, as Chi Lo argues in this edition of The Intelligence Report.
- Although monetary aggregates have recovered, the credit squeeze on the private sector has eased only slightly
- Further cuts to the reserve requirement ratio and interest rates look likely in the coming months
- The trade war with the US will remain the biggest risk overhanging the stock market.
China’s GDP grew by 6.0% year-on-year (YoY) in Q3 2019, slowing further from 6.4% in Q1 and 6.2% in Q2. Over the year to date, GDP has grown by 6.2% YoY. Even if Q4 growth were to come in at 5.8%, as many observers are anticipating, full-year 2019 growth would still hit 6.1% YoY. Meanwhile, nominal GDP growth slowed to 7.5% YoY in Q3 from 8.0% in Q2.
Supportive measures are having an effect…
Looking more closely, the data shows that the easing measures implemented by Beijing since July might be showing stabilising effects. September’s aggregate financing data was better than the market expectations with a broad-based recovery in credit growth.
This suggests that:
- the recent policy easing has started to filter through the system
- the credit shock from the failures of Baoshang Bank, Jinzhou Bank and HengFeng Bank this year has been contained.
But balancing debt reduction and private sector lending in China remains a challenge
However, most bank lending was still going to major corporations, while loan growth to the private sector remained slow (see Exhibit 1). Meanwhile, trust loans contracted further in September. This indicates that Beijing’s debt reduction policy is continuing to rein in shadow banking activity, especially in preventing loans to the property sector. However, this has also restricted access to credit by the private sector via official and shadow bank loans.
Exhibit 1: Bank lending to the private sector has remained slow
Source: CEIC, BNP Paribas (Asia); October 2019
The consumer price index (CPI) rose by 3% YoY, due mainly to pork price inflation (64% YoY in September after 47% in August) resulting from an outbreak of swine flu. However, core CPI remained at below 2% and the producer price index contracted again by 1.2% YoY, implying underlying deflationary pressures.
Although pork price inflation may add more upward pressure to headline CPI inflation, this should not affect the policy easing bias of the People’s Bank of China (PBoC) in the coming months unless broad-based CPI pressure starts to build.
Exhibit 2: Consumption as a share of GDP (%)
Source: CEIC, BNP Paribas (Asia); October 2019
Trade contracted both on the export and on the import side due to the trade conflict with the US and weak domestic demand momentum (see Exhibit 2). This will likely remain a significant headwind to growth.
Growth target will entail PBoC easing
The macro-policy direction from Beijing seeks to deliver an average 6.2% GDP growth rate in 2019 and 2020 to achieve the doubling of China’s real GDP growth from the level it was at in 2010. In this context, we expect the PBoC will need to ease monetary policy further.
We foresee a 50bp cut in the RRR and a cut of 40bp-50bp in the loan prime rate in the next three months. However, it is not clear whether the property sector would benefit from such measures, as Beijing remains wary of both a property price bubble and the fact that the property sector has been one of the biggest culprits in building up excess debt.
This article appeared in The Intelligence Report – 29 October 2019
For more articles by Chi Lo, click here >
For more posts on China and other emerging markets, click here >
To discover our funds and select the ones that meet your requirements, click here >
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.