Summary. Amid multiple downside risks, central banks around the global flag more easing and US Fed hinted to take a “precautionary” interest rate cut in July. Chinese economy recorded a short-term rebound in June and downside pressure will continue in 2H19. We expect China to reply more on fiscal policy to support economy given that it still has fiscal space.
- Overseas macro: Global manufacturing experienced significant drop with declining new orders, new exports and manufacturing activities. Exports of East Asian export-oriented economies such as Japan, South Korea, and Hong Kong continued to fall, reflecting weakening external demands. The escalation of trade tensions between Japan and South Korea in early July will hit South Korea’s semi-conductor industry hardest. IMF urged major central banks to get prepared for steeper global slowdown and backed monetary easing by central banks. The downside risks of precautionary interest rate cut is emerging asset bubbles.
- Chinese economy: With slowing resident income growth, heightening employment pressure and weakening property sales, consumption growth remains under pressure. Dipping land acquisition expenditure combined with tightening real estate trusts and US debt policies, signal the downward pressure on property market will remain in 2H19. The escalation of trade friction between Japan and South Korea may affect the import of some products in China. Looking forward, in the face of stricter regulatory measures in property market, limited quota of special bonds, waning personal consumption and possible escalation of trade skirmish, China’s economic growth remains under huge downward pressure, while fiscal policies are expected to continue to bolster the economy.
- Monetary policy: Demand for corporate financing remains weak in China amid sluggish internal and external demands as well as trade friction. The surge of special bond issuance and the reduction in off-balance sheet financing could explain more than 95% of Jun TSF rebound, which is however not sustainable and 2H19 TSF growth remains under pressure.
- Fiscal policy: The growth rate of general public budget revenue continued to decline due to the greater impact of tax cuts. If tax income growth further decelerates in 2H19, it is expected the government will raise the profits turned in by designated state-owned financial institutions and enterprises directly under the central government. Government pumps up spending on infrastructure, demonstrated by higher spending growth in transportation, environmental protection and technology development. Chinese government will also rely more on fiscal support to counter downside risks.
