Trade war-driven uncertainty eases
The United States and China in mid-January reached a "phase one" trade deal, at least easing uncertainty over future U.S.-China trade relations. The agreement will have Beijing purchase an additional $200 billion of U.S. goods and services over the next two years. In exchange, Washington agreed to reduce tariffs on $120 billion in Chinese products, from 15% to 7.5%. According to current data, exports were up 5% y/y in 2019, down 2.8 pps from 2018. Imports were up 1.2% y/y, down 11.6 pps.
GDP was up 6.1% y/y in 2019, down 0.5 pps from 2018. Growth rates for various quarters had been continuously falling, from 6.4% y/y in Q1 2019 to 6% y/y in Q4. Industrial output was up 5.7% y/y, down 0.5 pps from 2018. Investment was up 5.4% y/y in 2019, down 0.5 pps from 2018.
Retail sales of social consumption goods were up 8% y/y in 2019, and their real growth rate was 5.9% y/y, down 1 and 1.1 pps respectively. CPI rose 4.5% y/y in December 2019, up 2.6 pps from December 2018. Producer prices have been growing more slowly in 2019. In December, the ex-factory price index of industrial goods fell -0.5% y/y, and PPI fell -1.3% y/y. We expect producer prices to continue slowing.
Fiscal revenue rose 3.8% y/y in January-November 2019, down 2.7 pps from the same period last year. But fiscal expenditure rose 7.7% y/y, up 0.9 pps. So the fiscal deficit is rapidly expanding, and has reached 2.75 trillion yuan, a 41.6% y/y increase, constraining government’s future fiscal expansion.
The U.S. Treasury department on January 14th dropped its designation of China as a “currency manipulator.” The onshore RMB, which trades at 2% on either side of a daily midpoint set by the People’s Bank of China, was 0.2% stronger, at 6.8809 per dollar, its highest level since July 2019. Based on the SAFE dataset of "onshore FX settlement," non-banks showed net FX inflows of around $6 billion in December. China’s external capital accounts seem to have all stabilized, as we have previously forecast. We expect these indicators to improve significantly in 2020. Our faith is built on China’s still-strong fundamentals, relatively peaceful U.S.-China relations in a U.S. election year and China’s high capital return.
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