Daily Macro: RRR Rate Cut in China and more

In this briefing:

1. RRR Rate Cut in China
2. FX Reserves in China
3. UK Wrap: Politically Fragmented Outlook
4. Ten Years On – Asia Outperforms Advanced Economies
5. Beto’s Emergence: Pragmatic Policymaking Suddenly Seems Possible (Just 24 Short Months From Now)

1. RRR Rate Cut in China

The big news in Chinese finance was the PBOC announcing Friday that it was cutting the RRR rate. Rather than what you can read in the press, we want to focus on a variety of factors which may not be as widely recognized.

2. FX Reserves in China

FX reserves are up by about 10 billion dollars, which against a back drop of the size of FX and the Chinese economy is basically no change. They have been oddly flat over the past two years. Yet, the noise is really just that, the FX increase is so small that we believe it is a non-starter.

3. UK Wrap: Politically Fragmented Outlook

• Brexit: Agreement with the EU was concluded before reaching the required reassurances for parliament. A soft Brexit remains most likely, before breaking harder, but the politics is fragmenting the outlook.
• Economy: The post-referendum growth trend pace has re-established at 0.15% m-o-m, which appears to be above-potential. Inflation should temporarily slow below target despite domestic pressure building.
• Monetary policy: The BoE delivered its second rate hike in August to 0.75%. Bullish economic trends mean I expect the next hike in May-19, assuming a smooth transition becomes assured soon.

4. Ten Years On – Asia Outperforms Advanced Economies

You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.

5. Beto’s Emergence: Pragmatic Policymaking Suddenly Seems Possible (Just 24 Short Months From Now)

As market scrutiny focuses on the short-term effects of current trends – i.e., slowing global growth, the US government shutdown and the Trump ‘trade war’ – an overlooked longer-term prospect is that the US political outlook may finally be improving. 

Since Hillary Clinton’s sensational loss in 2016, the Democrat Party has been in disarray about whom to nominate for president in 2020, and this in turn has fostered the specter of President Donald Trump serving through 2024.  However, new polls now show that the Democrats may already be uniting behind a potential nominee who is not only vetted and viable, but also reasonably centrist (especially on economics).  This is the former three-term congressman from El Paso, Texas: Beto O’Rourke (no relation to this insight writer). 

O’Rourke’s emergence is significant because it can reduce perceptions of risk surrounding the 2020 election and, more importantly, offer prospects for sounder policymaking and international re‑engagement starting 24 months from now.  In particular, O’Rourke (like Obama) supports free trade and he voted for the Trans Pacific Partnership (TPP).  In contrast to redressing perceived grievances through ruinous tariffs, the TPP offered hope for bringing about equitable economic relations through positive inducements.  If the pact were to develop and expand with US participation, benefits to membership might become clear – which might eventually elicit interest from China and achieve the cooperation that Trump has fitfully pursued through coercive means.  In any event, the prospect of less US protectionism post‑2020 suggests that the recent downturn for exporters (e.g., Apple) may be, in the grand scheme, a blip – not the start of a secular decline.