China may put on stimulus for economic recovery

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Editor's note: Jimmy Zhu is chief strategist at Fullerton Markets. The article reflects the author's opinion, and not necessarily the views of CGTN.

China's fourth-quarter GDP data, together with another slew of economic figures released Monday reflect how earlier fears of a growth slowdown in capital markets may have been excessive, after local stocks slid by around 12 percent in the last three months of 2018.

For this year, further growth headwinds are likely before any economic bounceback.

A 0.3 percent acceleration in industrial output for the month of December increased hopes that the economy may be bottoming, which was reflected in the onshore bonds market, with 10-year government bond futures falling 0.22 percent to 97.920.

This shows that the economy isn't performing as pessimistically as some market participants had feared.

However, data shows optimism is still premature at this stage. Major factory-related indicators call for further policy support to stabilize manufacturing activities.

China's manufacturing PMI has fallen for four consecutive months and dropped below the key 50 level last month. PPI growth last month was at its slowest in more than two years.

Furthermore, Chinese imports from Australia contracted the most since July 2016, a sign that industrial demand for raw materials remained subdued in the last month of 2018. The chart below shows that any pick-up in Chinese GDP growth in the last decade usually correlated with an acceleration in imports from Australia.

Source: Bloomberg

External demands are becoming more challenging this year. Many investors are paying great attention to the progress of U.S.-China trade negotiations.

However, the latest trade data shows that trade tensions between the two largest economies are not the main cause of slowing overseas shipping activity. The bigger factors behind softer global activity are especially connected to key economies in the eurozone facing tremendous downward growth pressure, with the possibility of a hard Brexit rising.

Besides a fall in exports to the U.S. last month, Chinese exports to the EU dropped 0.3 percent on a year-on-year basis, reaching contraction territory for the first time since March last year.

Export growth to the ASEAN region moderated to 4.3 percent in that period, significantly slower than the average 12.7 percent growth rate of the last decade.

Therefore, it's challenging for the Chinese exporters' outlook to improve much without a synchronized global recovery.

Source: Bloomberg

The IMF's second downgrade on its global growth forecast in the last three months is worth mentioning. Besides fresh trade tensions, it warned that the downgrade mainly targeted growth in eurozone and emerging markets. It predicts global growth of 3.5 percent this year, below October's 3.7 percent estimate.

As China is the world largest trading partner to most major economies, the impact of a global slowdown on China's growth can't be neglected.

Based on our estimates, every 0.8 percent of a global growth slowdown would drag Chinese GDP growth by 0.1 percent. That being said, a further slowdown in global growth this year is likely to prompt Chinese policymakers to unleash more policy measures to offset external risks, regardless of progress on U.S.-China trade talks.

More fiscal stimulus can be expected in the coming months, with a possible widening budget deficit target this year. But one issue now facing the nation is that onshore funding remains tight.

With only an uptick in aggressive financing in recent months after the PBOC, the central bank, made multiple cuts to the reserve requirement ratio for major banks, the effects of monetary easing are limited as the pace of progress in infrastructure investment is set to slow due to decreasing access to credit. To solve that, issuing more bonds could ease the tight funding conditions.