9 November 2018
China data reflects pessimism about trade talks

Strong export data in October shows that Chinese exporters are worried that US tariffs will increase in January 2019. We expect this front-loading behaviour to continue for the rest of 2018, as we don't think the Xi-Trump meeting at the G20 will yield positive results. At the same time, China's fiscal stimulus could boost import growth in 2019

Strong exports due to front-loading activities

Exports grew 15.6% year-on-year, higher than the consensus of 11.7%.

We believe this growth is due to exporters' concern that the 10% tariffs on $200 billion of exported goods to the US will rise to 25% on 1 January 2019, which has led them to front-load exports.

Front-loading can't last long

Front-loading export activities should continue in November and December. So export growth data will continue to be stronger than in previous holiday seasons.

We think that President Xi's meeting with PresidentTrump at the end of November will not achieve positive results and as such the increase of the current tariff rate from 10% to 25% on $200 billion of US imported goods from China is highly probable. We're hoping the meeting doesn't damage the trade relationship even further, as Trump once said that if trade talks fail, he could raise tariffs on all Chinese imported goods.

Though US demand will continue to be strong, import tariffs on Chinese goods could have a dampening effect. We expect that some of these exports will be diverted to Europe. Whether they can also be diverted to other Asian economies depends on the extent to which those economies are themselves affected by the trade war. 

Strong export growth may not last very long. Export growth should slow under higher tariff rates and, as a result, we are not particularly optimistic on China's export growth in 2019, especially in 2H19.

Imports could grow faster

Front-loading is also the reason for strong import growth (at 21.4% YoY) though to a lesser extent, as importers worry that future export growth will decline.

Still, China has begun to implement fiscal stimulus and we expect that imports of building materials for infrastructure projects, as well as imports of consumables due to tax cuts, will partly offset slower demand for import materials for export manufactured goods.

Imports could, therefore, grow faster than exports in 2019.

Will China strengthen the yuan to facilitate cheaper imports

We do not think so as we believe that the USD/CNY and USD/CNH largely follow the direction of the dollar index. We believe in this trade conflict that China will passively follow the dollar index to avoid being labelled a currency manipulator by the US, and to avoid further possible damage on trade and investments.

Our forecasts on USD/CNY and USD/CNH at 7.0 and 7.30 by end of 2018 and 2019, respectively, are still intact.

ASEAN Morning Bytes

General market tone: Wait and watch

The US Fed remains on course to a ‘gradual tightening’, thanks to sustained strong economic growth and falling unemployment rate. The economic risks remain roughly balanced.

International theme: Strong US economy - Gradual Fed tightening

  • The US Federal Reserve remains on course for the fourth rate hike of the year in December. Aside from a signal of moderating fixed asset investment growth, the statement was little changed from the previous meeting. Reversing the post-midterm movement, stocks slipped and the USD gained against most G-10s while 10-year treasury yields were little changed.
Asia week ahead: Relief for Asia’s busiest central banks

Recent currency gains have taken the pressure off Asian central banks to tighten, while growth has started to taper off and inflation remains subdued in most of the region. A softer dollar in the aftermath of the US midterm elections combined with sliding oil prices suggest that hard-hit Asian currencies INR, IDR, and PHP will outperform

Three central bank meetings – all on hold

Bank Indonesia, Bangko Central ng Pilipinas, and the Bank of Thailand hold their monetary policy meetings next week. We expect all three to leave policy unchanged.

A moderation in GDP growth and subdued inflation (aside from the Philippines) is partially responsible for this. But more importantly, an ongoing consolidation in their respective currencies after significant losses earlier in the year is a big solace for BI and BSP, Asia's busiest central banks, in their drive to rein in currency weakness.  

The Philippine peso (PHP) was the region's best performer in October and continues to add to those gains in November with a 1.8% month-to-date (MTD) appreciation against the US dollar. This month, the best performing currency is the Indonesian rupiah (IDR), with a 4.4% of gain so far, recovering more than a third of the cumulative loss in the first 10 months of the year. The Thai baht (THB), which, in a sudden reversal of fortune, was Asia’s worst currency in October, has also joined in the rally this month. Lower oil prices are also helping to keep policy unchanged and, absent some adverse shock on the horizon, Asia’s hitherto hard-hit currencies are set to perform well.

This week, Indonesia and the Philippines reported steady GDP growth for the third quarter, at 5.2% and 6.1%, respectively. However, a softening of household spending- the key GDP driver in both countries- was alarming, particularly in the Philippines where inflation of 6.7% in October has already been hurting consumers. Until the Philippines GDP release, our house view had been for a 25 basis point BSP rate hike at the meeting next week. That's now been revised to no change, probably through the rest of the year (read more here). The same looks to be the case for BI policy, as a strong performance for the Indonesian rupiah and stable inflation around 3% allow for stable policy, for now.

Shifting between talk of continued accommodation and tightening (or normalisation), the BoT policymakers have missed the boat this year. Recent economic data undermines the government’s optimism on GDP growth this year – we have cut our 3Q forecast to 3.7% from 4.1% (read more here). This dampens the prospects for policy normalisation; it’s hard to call it tightening, which isn’t required just yet with continued low inflation and prevailing growth risks.    

Philippines: GDP prints at 6.1% as consumption slows

Downgrade of GDP and BSP policy forecast

Weak consumption, wide trade deficit limit GDP upside

Household spending, traditionally the driving force behind growth, has been slowing in the face of above-target inflation and elevated borrowing costs, posted 5.2% growth versus 5.9% in 2Q18 and from 5.4% in 3Q17. The 3Q  GDP growth of 6.1% brings YTD growth to 6.3%, well within reach of ING’s full-year 6.3% forecast.     

Reinforcements have arrived

With consumption decelerating, government spending and investments were up to the task, growing by 14.3% and 21.5%, respectively, to help offset the weaker punch from household expenditure. On the external front, the net trade numbers continue to be a drag on overall economic growth with the deficit sapping 4.06 percentage points from growth.

Change in game plan but net trade to continue to be a drag

Going forward, growth is likely to follow the same formula of late with slowing consumption offset by government spending and investments.  Meanwhile, given the burgeoning economy, the trade gap is expected to widen as imports of capital machinery, construction materials and consumer goods look to meet the demands of the economy, exerting fundamental pressure on the Philippine peso to weaken. 

“Moderate” rate hike next? BSP watch is on

The disappointing growth print may give some ammunition for the doves to call for a pause at next week's 15 November Bangko Sentral ng Pilipinas (BSP) meeting. The 150 basis point cumulative rate hike for the year is likely weighing on consumption and will dampen investment going forward. Holding off on an additional rate hike, as marginal as it may be, would give the Philippine economy the room it needs to catch its breath and sustain its above 6% growth trajectory in 4Q with the mid-term election approaching. With the 6.1% print, the likelihood that BSP leaves policy on-hold has increased with recent dovish undertones from key voting BSP officials likely to pick up as slowing consumption is now a “concern” according to the government. Stay tuned. 

Outlook for growth

4Q growth should moderate with household final consumption expected to decelerate further while the drag from net trade will likely remain.  Offsetting these two factors will be a possible pick-up in government spending ahead of the mid-term elections while business investment is seen to remain healthy, bringing 4Q GDP to 6.0% (down from the previous forecast of 6.2%). The projected slowdown in the last quarter forces us to revise our full-year 2018 GDP forecast to 6.2% while 2019 growth will likely settle at 6.3% with strong growth seen in 1H19 on election-related spending.

Reading time around 8 minutes

Good MornING Asia - 9 November 2018

The US Fed remains on course to a ‘gradual tightening’, thanks to sustained strong economic growth and falling unemployment rate. The economic risks remain roughly balanced.

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