China Outlook

As part of the Phase One US-China trade deal, the US has waived the tariff hike planned for 15 December and agreed to reduce the September 2019 tariff hike by half and “to modify its Section 301 tariff actions in a significant way”. In response, China has committed to substantially increase its imports of US goods and services; to not depreciate the Chinese Yuan (CNY) and to make significant structural changes regarding International Property (IP) protection, technology transfer and financial industry opening2. While the US-China trade war is by no means over, the announcement of the Phase One deal avoided an imminent tariff escalation, reduced trade war uncertainty and helped contain the malaise of US-China trade war frictions to other parts of the world. In 2019, US imports from China declined US$35Bn to US$497Bn while China’s imports from United States decreased by more – US$40Bn to US$125Bn. Consequently, we expect a comprehensive agreement remains in the best interests of both sides and President Trump will be conscious of this fact heading into an election year. The Phase One of the US-China trade deal concluded with the two sides consenting on a regular consultation and dispute resolution mechanism to maintain a more balanced trade relationship.

“As governments focus on economic restructuring and long-term sustainable growth, we expect policy measures to stay broadly accommodative. Over the past year, the government has embraced a more long-term approach in supporting the economy by placing greater emphasis on risk control and reigning in on short-term stimulus to avert macro imbalances. The People’s Bank of China announced on 1 January 2020 that it would lower the bank’s Required Reserve Ratio (RRR) by 50 basis points (Bps) which should help release long-term and low-cost funding to support the scheduled sizeable issuance of special local government bonds in January and February 2020. We expect another 50Bps RRR cut over the rest of 2020 which should help boost credit growth from 10.8% in 2019 to 11.4% in 2020.

“Chinese domestic activities have displayed signs of stabilisation towards year end in 2019 after the December tariff hike was halted and the prior September hike will be lowered. Retail sales rose from a low base helped by the 11 November 2019 online Singles day promotion, with both auto and non-auto sales showing signs of improvement. In addition, stable domestic demand helped support industrial production growth to a stronger than expected 6.2% improvement over the prior year despite subdued export growth. Infrastructure fixed asset investment increased to 5.2% while property investment edged lower to a stable pace of 8.4% helping drive overall fixed asset investment growth higher. Consumption has been the key driver of gross domestic product (GDP) growth and remains supported by solid employment growth and disposable income (6.1% in 2019 in real terms). China’s savings rate is high at 45%, nearly double that of the US. The truce on the US-China trade war has helped boost China’s exports and related activities thereby supporting sequential growth momentum into Q2 2020. China's export growth picked up from -1.3% year on year (y/y) to 7.6% in December, while imports jumped from 0.8% y/y to 16.3%, both helped by a very low base one year ago. Thanks to the strong rebound in December 2019, Q4 average exports and imports both picked up notably to positive growth of 1.9% and 3.2%, respectively. The improvement in Q4 exports was mainly led by emerging markets, in particular the Association of South East Asian Nations (ASEAN). Exports to the US weakened a bit more from -15%y/y in Q3 to -18% in Q4 (albeit less bad in December), likely weighed by September tariff hikes on the $110bn products.

“MSCI’s announcement in 2019 to quadruple the A-share inclusion factor from 5% to 20% (thereby representing a weight of 3.3% from 0.7% in MSCI Emerging Markets Index) also lent a tailwind to Chinese equities last year. This helped drive some passive buying of onshore Chinese stocks from funds that mechanically track the Index resulting in an estimated US$60-$89Bn in foreign fund flows into China’s onshore markets in 2019. Still, foreign ownership of Chinese onshore equities is extremely low compared to other emerging market equities providing plenty of scope for catchup.

“Looking ahead into 2020, China’s long-term prospects are dependent on its vital pivot away from the old industrial growth led formula towards the “new economy” growth drivers such as consumption and information technology. We expect the current Chinese equity market rally to extend into 2020 amidst ongoing volatility.”

Unless otherwise stated, data is taken from the Chinese customs authorities.

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