China’s Aug economic data came in with few highlights, indicating the economy is still in a trough in light of structural changes and external tensions. However, we expect stabilization in 4Q19, albeit temporarily for several reasons. China-US trade talk may progress steadily and we foresee room for RMB appreciation.
- Aug economic data highlights. 1) infrastructure investment picked up (+4.2% in Jan-Aug) and is likely to continue firming up; 2) real estate investment showed resilience and declined only modestly thanks to robust construction expenditures; 3) consumption growth (excluding car sales) stayed largely stable.
- Negatives/risks. 1) Industrial value-added growth plunged to record low (+4.4% YoY in Aug). High-tech industries have been weighed on by trade tensions and industry down cycles; 2) Manufacturing investment turned weak; 3) Lackluster car sales, which continued to drag retail sales growth.
- Reasons why we bet on stabilization in 4Q19, albeit temporarily. 1) Previous supportive policies will gradually take effect. Regarding monetary policies, we expect MLF operating rate to be cut by 10bp on 17 Sep when the next batch is scheduled to mature; 2) Infrastructure spending will firm up as construction may speed up to make up for delays due to summer weather; 3) Consumption will likely be prompted by car sales. We expect car sales to rebound in 4Q19, and 4) Timing effect. The 70th National Day and earlier Lunar New Year in 2020 may uplift economic activities in 4Q19.
- RMB likely to strengthen. In the short run, USD/CNY may find support at around 7.10 based on several evidence. 1) The authorities have been lifting USD/CNY mid-rate since the end of Aug; 2) RMB has depreciated “too much” from the perspective of CFETS Index, implying room for appreciation. Future strengthening factors include alleviation of China-US trade tensions, potential stabilization of China’s economy in 4Q19, etc.
- China-US trade talk – back to economic rationale. As the Oct top-level talk approaches, both sides showed gestures of “good will” to break the deadlock, represented by the U.S. delaying tariff hikes and China exempting U.S. soybeans and pork from planned penalty tariffs. Businesses and corporates from both countries are holding more active dialogues, pushing the trade talk back on economic rationale. We maintain our view that China-US trade negotiation is progressing in a favorable direction, and is likely to yield some partial deals by year end. The best option for the two countries is to seek common grounds while setting aside differences temporarily.
