Financial indicators reviving

CHINA - Report 25 Feb 2019 by FAN Gang and Chunyang Wang

Due to the seasonal lack of comparable y/y data in the month of Chinese New Year, we can only analyze data from imports and exports, and on financial conditions and price levels. Prices are trending downwards. The ex-factory price index of industrial goods has been slowing for the past three months. The growth rate in January was only 0.1% y/y, with a higher probability of being negative. PPI demonstrated a similar trend. Its growth rate in January decreased to 0.2% y/y. CPI rose 1.7% y/y, and has been slowing for the past three months. We expect prices to fall further.

Though exports rose 13.9% y/y in January, seasonally adjusted export growth might be very low, or even negative. This indicates that the export growth slowdown since November 2018 has not stopped. The U.S.-China trade war is damaging the trade of both countries. But in January, the trade surplus with the United States reached 188.4 billion yuan, up 30.1% y/y, indicating that U.S. trade was more deeply hurt.

Key financial indicators turned upward. At the end of January, M1 was up 0.4% y/y. The Spring Festival adjusted increase was instead about 3 pps higher than in January 2018. M2 was up 8.4% y/y, trending upwards in the past two months, and up 0.4 pps from last November. Total societal financing scale rose 50.7% y/y. We’ll need to evaluate February data to be more sure of whether the rapid increase reflects economic fundamentals.
The People’s Bank of China in February raised its gold holdings to 59.94 million ounces, according to data on the Bank’s website, diversifying its portfolio from its position as the largest U.S. Treasury bond holder. Diversifying to gold from U.S. bonds increases the already-high U.S. borrowing cost, constraining Trump’s wall building, and trillion-dollar infrastructure projects. This diversification, plus the growing China-U.S. trade surplus, gave China leverage in negotiating with the Trump administration. We don’t think this trade war will last too much longer.[F1] In other key external financial indicators, the RMB appreciated significantly against the dollar, from almost 7 to 6.71. Meanwhile, foreign reserves and FDI are stable. The stability of these indicators erased concerns over international capital outflows, and investor pessimism.

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