Global liquidity improving, but markets still need China

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Markets and economies should welcome looser central bank policies, but other drivers will need to join in for emerging market growth to get a boost.

  • Monetary easing is one thing
  • But demand needs propping up as well
  • China is taking action which should prove helpful

With the US Federal Reserve and the ECB retreating from interest-rate normalisation and the BoJ continuing to ease monetary policy, liquidity around the world is improving from the 2018 levels. This should, presumably, be good for emerging markets (EM) including Asia. But cheap money is only one positive. We still need growth to be sustained. In my view, this is where things get tricky.

Developed market PMIs flashing amber

Germany’s flash PMI, which can be seen as an indicator of near-term economic trends, hit a seven-year low in March. The US equivalent dipped to its lowest reading in more than two-and-a-half years, and Japan’s flash purchasing managers index fell to a three-year low.

So all this recent monetary easing is not for nothing and may actually not be all good news. EM, especially Asia’s open economies, needs external demand, in addition to cheap funding, to sustain growth.

China to the – emerging market – rescue?

This is where China comes in. Since the Great Financial Crisis, growth in Chinese demand has picked up much of the slack left by weakened demand in the West. So, if developed market growth now pulls back again, allowing local authorities to ease policies, we will need a corresponding rise in Chinese demand as was the case post the GFC.

However, China’s growth momentum has been weakening since 2018. Beijing has recently promised a bigger stimulus package to revive demand. While we expect the Chinese economy to stabilise in the second quarter of 2019 and recover moderately in the second half, the question for EM/Asia is: how quickly will this stimulus filter through both China and the regional economies?

Picking up speed… moderately

We expect China’s stimulus to gain traction by the middle of this year. But there is more uncertainty over the impact of the measures this time around because part of the easing focus is on boosting private-sector spending rather than predominately on fiscal, or quasi-fiscal, spending as in previous cycles.

Nevertheless, the Chinese authorities are bringing forward infrastructure projects, particularly subway systems, loosening monetary policy and delivering tax cuts. The moderate economic recovery that we foresee should provide measured support for the regional and commodity markets, ceteris paribus.

In a nutshell, the markets still need Chinese growth to recover. Otherwise, the monetary relaxation in the West, prompted by weakening demand, may not lift the regional economies and financial markets as one might expect.


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Chi Lo

Senior Economist for China

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