Breaking News
0

China’s Slowdown And Financial Markets

By Cumberland Advisors (Bill Witherell)Market OverviewJan 11, 2019 02:11PM ET
www.investing.com/analysis/china-slowdown-and-financial-markets-200374887
China’s Slowdown And Financial Markets
By Cumberland Advisors (Bill Witherell)   |  Jan 11, 2019 02:11PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The Shanghai Stock Exchange was the worst-performing major stock market in 2018, with the benchmark Shanghai Composite index falling 25% over the course of the year. Concerns about a slowing economy deepened in the second half as current indicators surprised on the downside. While many economists cautioned that a major slowdown in China was not likely, much less a recession, investor, domestic consumer and business sentiment have all clearly worsened. As discussed below, our base-case expectation is that the slowdown will prove to be modest, with the pace of economic activity beginning to pick up in the second quarter of 2019. Risks to this outlook, however, are mainly on the downside.

Base-Case Expectation

The Chinese economy clearly did slow during the second half of 2018. GDP growth eased to a 6.5% annual rate in Q3, the slowest growth since early 2009, and looks likely to have moderated further to a 6.3% pace in Q4. Estimated economic growth for the year is 6.6%, moderately slower than the 6.9% rate for 2017, but still relatively robust.

Data releases in the fourth quarter intensified concerns about the likely magnitude and duration of the slowdown. The Caixin China General Manufacturing Index for December weakened to 49.7, its lowest level since May 2017. Note that 50 is the reading that separates expansion from contraction. New orders fell marginally and domestic demand weakened. More positive data was reported several days later but got limited attention. The Caixin China General Services PMI for December registered a solid upturn in services activity, achieving a six-month high. This resulted in a five-month high in overall business activity, combining manufacturing and services, in December. Also ending the year on a positive but still subdued note, business sentiment improved in both the manufacturing and services sectors.

The leading cause of China’s economic slowdown appears to be a serious liquidity crunch that falls most heavily on small, privately owned companies. These firms contribute some 60% of GPD growth and 90% of new jobs. Government policies unintentionally led to these liquidity problems. Back in mid-2016, China’s economic policy switched from stimulus to restraint in response to concerns about a rapid buildup of unregulated shadow bank lending, often risky to borrowers. Restrictions were placed on shadow banking with the laudable objective of enhancing financial stability. These measures tended to cause funding problems for smaller firms and also for infrastructure projects, while state-owned enterprises continued to have preferential access to bank loans.

Liquidity Pump

China’s central bank has recognized this problem and is moving in a determined way to pump increased liquidity into the economy. It announced last week a $117 billion reduction in required bank reserves. Also, the government urged China’s three largest commercial banks to boost their lending to small privately owned businesses. At a meeting in early December, China’s economic policy officials signaled that tax cuts and increased fiscal spending would be coming this year. Last week, Premier Li repeated these intentions for strengthened countercyclical adjustments in macroeconomic policy, including further monetary policy easing.

This policy switch back to stimulus should be sufficient to counter the credit crunch and is the main reason that we expect the weakening trend in the economy to end in the first quarter, followed by modest strengthening in the remaining three quarters of 2019. Growth for the year 2019 is projected at 6.3%. A critical assumption underlying this relatively sanguine outlook is that the US-China trade negotiations progress constructively. Nothing is certain, but both sides have a strong interest in reaching positive outcomes, probably in a sequence of steps that will take considerable time to achieve.

The trade conflict does not appear to have had a great impact on China’s exports in the closing quarter of 2018, as traders front-loaded shipments before the year-end deadline. But the US-China trade war has negatively affected market sentiment in China and around the globe, stoking fears of a more substantial economic slowdown in China and other countries, particularly in Asia. And the slowdown of the globe’s second-largest economy from 6.9% in 2017 to an estimated 6.3% in 2019 will have significant effects on other economies and product markets.

Another possible headwind that has picked up recently is China-Taiwan relations. China’s president Xi Jinping last week asserted China’s right to use military force against “foreign powers” that intervene on the issue of self-rule for Taiwan. This push-back followed President Trump’s signing a law providing US arm sales and high-level visits to Taiwan. This issue risks making the trade negotiations much more difficult or even impossible if all parties are not very prudent.

Bottom Line

In sum, investors do have reasons to be cautious about China’s stocks. With last year’s substantial correction and prospects for an early end to the current modest slowdown in China’s rapidly growing economy, valuations do look attractive. If the trade negotiations appear to be moving in a positive direction, markets will surely respond favorably. But there will remain significant risks. Chinese stocks historically have been volatile and that volatility is likely to continue.

Sources: Financial Times, Markit Economics, Barclays (LON:BARC) Research, Geopolitical Futures, OECD

China’s Slowdown And Financial Markets
 
China’s Slowdown And Financial Markets

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email