China: The trade war is not over
The Chinese economy is weakening on several fronts and not just because of the US-China trade war. In response, the government is looking for ways to boost consumption. Tax cuts may not be enough to avoid a softening in the labour market…
At the end of January 2019 there were two major events in China that caught our attention. The first was the trade negotiations with the US, which ended without a major breakthrough. The second was the announcement of a Targeted Medium Term Liquidity (TMLF) by the People’s Bank of China. Under this facility, the central bank will lend to commercial banks at a lower interest rate, provided the commercial banks increase lending to smaller private firms. These two events highlight that the Chinese economy continues to face uncertainty from the trade war, and the government will continue to support the economy through this period.
Chinese vice premier and lead trade negotiator Liu He returned from Washington with some progress made, but without a final deal with the US. Negotiators have agreed some concessions on agricultural exports, but not resolved the key issues around intellectual property rights, the transfer of technology, and the role of state-owned enterprises. As outlined in the global trade section we do not think that the trade war will end by 1 March 2019.
The Chinese government relies on infrastructure again
President Xi emphasises that the government will protect the economy from key risks. Apart from fiscal stimulus, with more metro lines built at the city level, there will be ample funding for private firms to avoid another wave of defaults, which amounted to around CNY100 billion in 2018. Funds from the TMLF are likely to be used by private firms to repay maturing debts. These funds will therefore not do much to spur further growth, but without them, China would face a series of private firms closing down, seriously hurting the job market.
Retail sales have already been slowing down in some segments, with sales of automobiles particularly hard hit. Cars could be a special case as they are still considered a luxury item. But the falling trend of clothing consumption makes us worry that consumers are tightening their belts.
Falling retail sales and even worse for cars
This suggests that tax cuts for salary earners may not yield a proportional rise in consumption. Individuals are likely to save some of the tax rebates during bad times. Corporates will behave in a similar way and are unlikely to invest as much as they do in good times, even with tax cuts.
Local government officials are turning to similar stimulus measures used in 2009. For those who remember, local governments in rural regions boosted consumption successfully in 2009 by promoting consumption on household electronic goods and cars. Now in 2019, the same measures are being used again to prop up spending in the rural regions. We doubt if this project will yield the same successful result because households already own those goods.
Without growing domestic demand, the trade war damage to the export and manufacturing sectors could be passed on to service sectors, e.g. retail sales.
We believe the trade war is not over yet, but the PBoC is reluctant to change its exchange rate policy (i.e. allowing USD/CNY to follow the dollar index). As such, we are revising our USD/CNY forecast to 6.75 from 7.3.
Download
Download article
8 February 2019
February Economic Update: Stick or twist? This bundle contains 9 articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).