Expect the Reserve Bank of India to tighten by 25bp to stem the currency weakness. Trade and inflation releases for May will be the other highlights
So far everything has been limited to verbal skirmishes but no action. While we will continue to see more trade noise in the period ahead, markets will focus on hard data. And there is plenty on the calendar from China, Taiwan, Malaysia, and the Philippines.
We expect sustained export strength in China and Taiwan with double-digit growth, but less so in the other two economies. After underperforming in 2017, China’s exports have been doing well this year with 14% year-to-date growth. On the other end is the Philippines with a 6% fall explaining the ongoing plight of the peso.
Meanwhile, China’s foreign exchange reserve data for May will provide a sense of capital outflows amid accelerated USD appreciation against major currencies, including the yuan. Our Greater China Economist, Iris Pang expects this to be reflected in a drawdown of reserves, by about $20bn a month. She also expects continued CNY depreciation ahead and has revised the USD/CNY forecast to 6.60 from 6.33 for 2018.
Both manufacturing and non-manufacturing PMIs show the Chinese economy grew solidly in May. We expect this to continue as China is investing in high-tech sectors to cushion the impact of trade tensions
PMIs of manufacturing equipment and high-tech products came in at 53.0 and 54.8, up 1.3 and 1.0 points respectively from April, and higher than the headline PMI of 51.9 in May, which was already above the 51.4 in April. These two items have been consistently higher than the headline figure. This shows that China already has the fundamentals to build even more advanced technology.
Manufacturing of consumer goods was also strong at 52.7, and stabilised from last month. Combined with new export orders PMI at 53.8, up from 52.9, which has been higher than new export orders at 51.2, this shows that consumption demand in China is solid.
Strong consumption demand is also reflected in large demand for electricity for cooling from the hot weather in the southern part of China, and the high-energy-consuming manufacturing PMI rose to 50.5 from below 50. Although high-energy consumption is not as positive from an anti-pollution perspective than clean-energy production, the high demand for electricity for cooling implies that the overall population generally can afford a higher electricity bill for a more comfortable life. This exposes the risk of China not having enough clean energy production and infrastructure investments.
Inbound tourism, air flights and shopping activities during the Golden Week boosted the non-manufacturing PMI to 54.9 from 54.8. We have to bear in mind that most service businesses, like banking, were closed on holidays. That explains a small increase in the non-manufacturing PMI.
The PMI figures confirm our view that the Chinese economy is running at a decent speed. Combining this with April's industrial profit data, we confirm that our GDP forecast of 6.8% for 2Q18 stills holds.
Forthcoming trade tensions could put pressure on trade and related supply chain activities, however. We believe that investment decisions in potentially affected industries have been delayed.
Still, the government together with corporates have increased investment to develop the highest-end technology in the semiconductor, telecommunication and transportation sectors.
We are therefore optimistic about the overall economy.
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