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It hasn’t happened yet, but it’s bound to. China’s stimulus worked, then it didn’t. The trade war is going into overdrive now, with threats to put tariffs on everything Made in China that comes into the U.S. Beijing will be spread thin, throwing lifelines to companies that may have their American suppliers negotiate lower prices or finally look elsewhere to avoid duties upwards of 25%.
When China starts pumping up its real state market and turns a blind eye to provincial shadow banking, then you know things are not going according to plan in Beijing.
So far, there is no indication that shadow banking is back in the credit game. But give it time. This trade war only escalated this week.
Recent economic data is showing signs of retreat. China bears will love to point out that the economy is stalling, even though numbers are still mostly positive. They just are not as positive as they were a quarter ago or more.
China’s National Bureau of Statistics (NBS) released April activity data on Wednesday. The Deutsche X-Trackers CSI-300 exchange-traded fund (ASHR), best known as the A-Shares ETF, rose 0.9%. It’s down over 10% in the last four weeks. None of the rise was due to NBS data. It likely gained on comments from Treasury Secretary Steve Mnuchin that trade talks are still coming along.
Investors have heard that line since January.
Washington is still preparing tariffs on over $300 billion worth of more Chinese imports.
Outside of the stock market and trade war hopes, China’s year-on-year growth of industrial production, retail sales, new home sales and fixed asset investment all dropped in April after a slight rebound in March thanks to stimulus and the Lunar New Year. All of these readings are significantly below market expectations.
“The latest Chinese economic activity data was disappointing,” says Neil MacKinnon, an economist for VTB Capital in London. VTB Capital is one of Russia's best known investment firms. “The Chinese equity markets responded positively (because) it can only prompt further policy stimulus,” he says.
In the near term, that stimulus likely means more liquidity injections by the big state banks into businesses large and small and cuts in interest rates.
Reductions in the amount of money banks are required to have on hold, known as the reserve requirement ratio, are correlated with movements in foreign exchange rate between dollar and yuan. A weaker yuan means Beijing will get its banks to pump more credit into the system.
Fiscal policy moved to a pro-growth stance in the first quarter, though the size of the fiscal stimulus, sitting between 0.5% and 1.0% of GDP, is limited because of upward pressure on budget deficits and Xi Jinping’s very vocal promise to curb excess debt and leverage.
Will provincial governments listen to him?
At times like these, who knows? No one has ever taken it to China like Donald Trump. It is unclear how China will respond, except now we know that Beijing considers this a trade war now rather than a trade dispute. Or better yet, a “people's war.”
April’s Numbers
- IP growth grew 5.4% annualized in April from 8.5% in March. Retail sales growth was 7.2% year-over-year in April from 8.7% in March. Fixed-asset investment growth slowed to 5.7% in April from 6.4% in March, taking the year-to-date growth down to 6.1% from 6.3%. That's similar to last year's, only a bit higher.
- Growth of infrastructure investment moderated to 3% in April from 3.3% in March, meaning China is spending a little more than they did on average in the first quarter.
- Property investment growth is unchanged at 12% in April from March but higher than 2018’s growth rate of 9.5%. Growth of new home sales was 1.3% April versus 1.8% in March, which is better than the first-quarter growth rate and on par with all of last year. Real estate is still being pressured not to go gang busters.
- Land sales growth, the favorite cash cow of the provincial leaders, fell by 35.5% annualized in April after falling 31.5% in March. The first-quarter average was -33.1% versus a 2018 growth rate of 14.2%. Something’s got to give here.
- China’s Passenger Car Association said car sales fell 16.8% in April after falling 11.7% in March, keeping in line with declines in the first quarter and all of last year. This market is saturated, and it is unclear whether new, planned stimulus will help. It might, if the Chinese are basically waiting for it before spending money on a new car.
Nomura Securities’ chief China economist, Ting Lu, expects strong headwinds to exports, property markets in lower-tier cities, passenger car sales, mobile phone sales and construction equipment going forward. The trade conflict will add more downside pressure on China’s exports and investment plans , especially for manufacturers serving U.S. clients.
That doesn’t mean the bears have won.
Economic data could slightly pick up in May due to frontloading of exports to the U.S. as a response to a possible 25% tariff hike to an additional $300 billion worth of China’s exports. The plunge protection team at the People’s Bank of China, or Chinese state-run investment funds, could provide a backstop to the China A-shares. Worth noting, too, however, is China’s willingness to let Shanghai and Shenzhen stocks tank. There is no guarantee that Beijing will save China's stock market.
For Lu at Nomura, look for Beijing to ramp up monetary easing and stimulus measures in an effort to stabilize sentiment and keep growth in line with its 6% GDP growth target.
There is also this:
“We expect Beijing will push forward its nonconventional policy easing measures, such as providing special support to the private sector, cutting taxes and deregulating the property markets in big cities,” Lu says. “Special support” means subsidies. Perhaps some of it provided by off-book lending at the provincial level. Deregulating the property market means more money out of the A-shares and into housing, long considered a safe haven in China.
“There is no doubt a tariff war has the potential to do serious damage to China’s already fragile economy,” says Brian McCarthy, chief strategist for Macrolens, an investment research firm paying close attention to China these days. “Take toys as an example. In 2017 China exported $54 billion in toys and games, $18 billion of which went to the U.S. If toy companies were to relocate out of China to avoid the U.S. tariffs, China doesn’t just lose $18 billion in exports to us,” he says. “They lose the entire market.”
