Brief Macro: Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness and more

In this briefing:

1. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness
2. Hong Kong’s Growth Mirage

1. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

China has won the trade war so far, with China’s exports to the US rising 11.3% YoY in 2018, while its imports from the US rose just 0.7% YoY. For the latest two months (Dec18-Jan19), China’s exports to the US declined 3% YoY, but its imports from the US declined a precipitous 38.5% YoY. (The logic is obvious: less than half of China’s exports to the US carry tariffs, while over 80% of US exports to China must pay large import tariffs). Luckily for China, US President Trump has still allowed the March 1st deadline to be extended. That, combined with a weak US$ (and a far more dovish US Federal Reserve than 3 months ago) have taken pressure off the stressed Chinese economy. That any US-China trade deal will result in a stronger RMB takes further pressure off China, which otherwise saw net capital and services/income outflows of US$105bn in Nov18-Jan19 even amid the weakening of the US$ (numbers that would have been worse if the US$ had stayed strong, inducing larger capital outflows). 

The stress is most evident in domestic demand, with China’s imports down 4.5% YoY in the latest two months. China’s car sales declined 6% YoY in 2018, the first yearly decline since 1990, with car sales down 16.7% YoY in 4Q 2018 and down 19% YoY in December, with Chinese car brands’ sales declining 22% YoY in January 2019 (while total passenger car sales fell 17.7% YoY). This was a climactic reversal, as China’s car output had grown 20-fold between 1995 and 2017. The PBOC has responded with 350bp of cuts in banks’ RRR (to 13.5% by , from 17% a year ago), in a move to boost the money-multiplier (but with a modest impact on M2 and loan growth). 

China’s total social financing (TSF) rose by a record RMB4.64tn in January 2019, betraying signs that policy makers were panicking, hence turning on the shadow lending taps anew. Although TSF rose less in 2018 than in either 2016 or 2017, it rose more in 2H 2018 than in 2H 2017, responding to the monetary easing in 2H 2018. Despite a year of persistent and aggressive monetary easing, China’s M2 had grown a modest 8.1% YoY in 2018, up only marginally from 8% YoY at the end of October and November 2018; in January 2019, M2 accelerated to 8.4% YoY growth in response to the latest RRR cuts. FAI (fixed asset investment) slumped to just 2.5% YoY growth in May and July 2018, but then rebounded in the rest of 2018 (growing 5.9% YoY for the whole year). Opening the spigot of shadow lending involves the last throw of the dice: Premier Li Keqiang is among leading critics of this policy approach. For now, both the possibility of a trade deal and the weakness of the US$ are near-term positives that will buoy China. But the only remaining factor consistently buoying China’s growth is exports: so China will perforce need to make significant concessions in the final trade negotiations. If it does not, the positive scenario will rapidly deteriorate, and China’s high-wire act will collapse.  We are cautiously bullish on China in the near-term (3-month horizon), but remain negative on a longer-term (9 months and longer) view. 

2. Hong Kong’s Growth Mirage

It may not feel like it. It may not smell like it. But make no mistake Hong Kong is in recession. We are underweight in our relative regional equity portfolio.  The only positives are that the real cost of lending is easing (which might bring some relief to mortgage owners) and Hong Kong corporate balance sheets are in good shape to weather the current downturn. But the negative overwhelm these positives.