Weak Yuan compensating for potential trade war losses

CHINA - Report 23 Jul 2018 by FAN Gang and Chunyang Wang

GDP was up 6.8% y/y in H1, the same rate as in H2 2017. Industrial output was up 6.7% y/y, up 0.4 pps from H2 2017.

Fixed asset investment was up 6% y/y in H1, down 2.6 pps from H1 2017, and up only 0.3% y/y in real terms, down 3.5 pps from last H1. The major drop of state investment is likely the main cause. Possibly following the government’s deleverage reform to reduce financial risk, state investment rose only 3% y/y, down 9 pps from H1 2017. In H1 2018, retail sales of social consumption goods rose 9.4% y/y in nominal terms, and grew 7.7% y/y in real terms, down 1 and 1.4 pps from H1 2017.

CPI was very stable in H1. It rose 2.2% y/y in Q1, and 1.8% y/y in Q2, the same rate as in Q4 2017. In H1, growth rates for producer prices weakened in February-March, but rebounded strongly in May-June. In June, the ex-factory price index of industrial goods rose 4.7% y/y, up 0.6 pps from May, and increased 0.3% m/m. PPI rose 5.1% y/y, up 0.8 pps from May, and increased 0.4% m/m. Tightening monetary policy puts constraints on prices’ future growth.

At the end of June, M2 was up 8% y/y, down 0.3 pps from May, and down 1.4 pps from last June. It reached a historically low new rate. Saving deposits rose 5.5% y/y, down 0.2 pps from May, and down 5.2 pps from last June. Stricter financial regulation is the main cause for cooling financial indicators.

Exports were up 4.9% y/y, down 10.1 pps from H1 2017. Imports were up 11.5% y/y, flat on H1 2017.

From April to June, the Chinese yuan depreciated against the dollar at monthly rates of 0.9%, 1.5%, and 3.5%. The yuan has been depreciating against other currencies at the same time, while the trade war with the United States intensifies. The latest episode was on July 20th, when U.S. President Donald Trump threatened to levy tariffs on every good imported from China, referring to the $505.5 billion in Chinese imports the U.S. took in last year. Trade and U.S.-China relationship uncertainty might explain the yuan’s depreciation. However, yuan depreciation may compensate partially for Chinese exports to the United States during the trade war. Moreover, depreciation can boost Chinese exports to other countries. With net exports taking only a small share of Chinese GDP, we don’t expect the trade war to negatively impact the Chinese economy much.

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