New data show China’s price-driven recovery which came on the back of the commodity super rally in late 2016 is starting to lose steam.
A decline in new orders underpinned by falling input prices supports ANZ’s forecast for a softening of momentum in the rest of 2017.
Solid property investment suggests developers remain optimistic despite demand-side tightening measures in first- and second- tier cities. A long-term housing slump is a remote scenario in China.
"The meeting in April between Chinese President Xi Jinping and his US counterpart Donald Trump has paid off.” -Raymond Yeung
China’s producer price index peaked with a sequential decline of 0.4 per cent in April in line with ANZ’s expectations. We could still see a negative headline at year end if the trend persists.
External demand
The meeting in April between Chinese President Xi Jinping and his US counterpart Donald Trump has paid off.
Despite a sustainable trade balance with the US the US Treasury did not call China a currency manipulator.
Heightened geopolitical risk in Korean peninsula has seemed to help cultivate a warmer Sino-US relationship and reduced the risk of a trade war - and an unexpected devaluation of the RMB.
China’s risk profile has shifted from external to domestic following the Xi-Trump summit, with financial deleveraging increasingly concerning.
Market
Money markets have reacted sharply to Chinese regulatory tightening which aims at combating inter-connectedness between banks and non-bank financial institutions.
Given a significant exposure of wealth management products in the bond market, the 10-year Chinese government bond yield has surged 30 basis points since early April. Such measures heighten the financial risk if the contagion evolves and deserves close attention.
Consumer confidence is currently at pre-GFC highs and policy direction will likely aim to secure this sentiment ahead of China’s National Party Congress in November.
Policy
The Chinese central bank’s issuance of reverse repos at lower-than-market rates reinforces ANZ’s view the PBoC is not aiming to tighten its monetary policy aggressively.
The bank is expected to calm the market with more liquidity injections and look at a stronger fiscal push to secure growth, probably via initiatives like Belt-&-Road and Xiong’an.
Exchange
There are signs of easing capital flows in China reflected in monthly payment data. But the government still wants more control over the external balance as seen in the introduction of a counter-cyclical adjustment factor in the yuan daily fixing. The risk of a policy surprise has increased.
Raymond Yeung is Chief Economist, Greater China, ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
21 Apr 2017
04 May 2017
05 Apr 2017