The People’s Bank of China (PBoC) recently cut the benchmark interest rate and deposit rate by 0.25% apiece and also reduced the reserve ratio requirement (RRR) by 50 basis points. Now, some economists and forex traders are anticipating even more stimulus from the PBoC before the year ends. Do the latest reports from China support this?
China’s Q1 2015 GDP grew by 7.0% from a year earlier, the weakest since 2009 and just barely within the government’s target. Also, China’s economy seems to be shifting from one driven primarily by manufacturing, infrastructure, and exports to one driven by services and domestic consumption since services account for about 51.6% of Q1 2015 GDP while manufacturing only contributed about 42.9%.
Moving on, China’s trade balance showed a trade surplus of 366.8 billion yuan. While this looks good on the surface, digging through the details shows a rather dismal outlook since China’s exports fell by 2.8% in May, the third consecutive month of declines. The only reason China saw a trade surplus is because imports declined by 18.1%, which hints that domestic demand has shrunk considerably. Iron ore imports in May also declined by 12% due to a weakening property market and factory overcapacity, marking it as the slowest import pace since November 2014.
Looking forward, Q2 2015 GDP is scheduled for release on July 15 and many economists are already forecasting that growth will fall even further due to another downturn in the property market, as well as factory overcapacity brought about by lower global demand for Chinese products
2. Consumer Spending & Sentiment
Year-on-year, China’s retail sales ticked slightly higher in May from 10.0% to 10.1%. The month-on-month reading saw an improvement too (0.81% actual, 0.72% previous).
In addition, China’s National Bureau of Statistics reported that the the housing index fell by 5.7% year-on-year but went up by 0.2% month-on-month, which is the first uptick since April 2014. Also, China Confidential’s home buying sentiment index went up to 53.9, indicating optimism among consumers who intend to purchase a home for self-occupancy. China Confidential’s property investment sentiment index, meanwhile, was still down in the dumps at 45.0, indicating that people are still pessimistic when it comes to buying properties as investments.
The most cited reason for a lack of interest in real property is that Chinese investors are more interested in stocks, given that 54.5% of the respondents surveyed by China Confidential intend to purchase stocks within the next 3 months whereas only 13.9% want to invest in real property. I guess most Chinese investors haven’t found out just how awesome the forex market is.
3. Business Conditions & Sentiment
China’s industrial production in May accelerated from 5.9% to 6.1% on a year-on-year basis. In line with this, Markit’s manufacturing PMI reading for June (49.4 actual v.s. 49.2 previous) showed that the contraction slowed down a bit, thanks to a slight increase in both overseas and domestic demand. It’s still a contraction, though, and for the fourth consecutive month no less.
Moreover, the National Bureau of Statistics’ (NBS) official PMI reading shows that manufacturing PMI for June remained unchanged at 50.2, which means that the manufacturing sector’s expansion leveled out.
As I discussed in my Global Inflation Update, China’s headline CPI for May only increased by 1.2% (1.5% previous) while core CPI increased by 1.6% (1.5% previous). Incidentally, the headline CPI’s slower increase was cited as one of the reasons for cutting rates back in May, although China keeps insisting that it was meant to promote investment and growth.
A closer look at the data shows that the 1.6% increase in food prices was the main driver, contributing about 0.54% to the headline CPI. It is also worth noting that the overall prices of services grew by 2.1% while other overall prices of consumer goods only went up by 0.9%.
Summary & Effects on the Forex Market
Overall, there seems to be a lot of arguments supporting a decline for Q2 GDP since the the manufacturing sector is either contracting (if you believe Markit) or stalling (if you believe the NBS). Furthermore, China’s inflation levels declined and future prospects don’t look so good since there are signs that China’s consumer spending isn’t picking up as well as it should.
Also, it seems like private investments are being channeled excessively towards the equity market at the expense of other investments, such as real property. Heck, I’m willing to bet that a large chunk of the impressive 900.8 billion new yuan loans issued in May (707.9 billion previous) went straight to the stock market – the very same stock market which has seen the Shanghai composite index lose about 20% since its recent high. And I’m pretty sure that would have a negative effect on consumer spending and sentiment down the road.
Okay, so how will it affect the forex market? As I discussed in a previous article, it doesn’t really have much of an impact on the Chinese yuan since the PBoC openly manipulates the yuan’s forex levels. But if Q2 figures are disappointing, then these would most likely have a negative impact on the commodity currencies, namely the Kiwi and the Aussie due to their close trade relations to China.