Driving the Day
1. Economy still slowing
Q2 economic data dropped this morning.
The big number:
- Real GDP growth was 6.2% y/y – down from 6.4% in Q1 and right in line with expectations.
Our take: Nothing to see here. China’s economy is slowing. That’s not news.
This was surprising:
- Nominal GDP growth accelerated to 8.3% y/y – up from 7.8% in Q1.
Our take: It’s possible that property and/or food prices may be pushing up inflation – but this is not a sign that the economy is about to come screaming back to life.
Several of the monthly “hard” data points surprised on the upside:
- Cumulative fixed-asset investment through June was up 5.8% y/y – through May it was up only 5.6%.
- Retail sales growth clocked in at 9.8% y/y – up from 8.6% in May and the highest print since March 2018.
- Industrial production grew 6.2% y/y in June – up from 5.0% growth in May.
But don’t get too excited. Imports, exports, and PMIs are all looking weak (see Entry #3). And PPI is flirting with deflation (see July 10 Tip Sheet).
What’s more – bank lending is still weak (see next entry). That doesn’t augur well for near-term growth.
The bottom line: We see growth continuing to fall through Q3 before stabilizing in Q4.
2.Data dump – credit
Monthly credit data wasreleasedFriday.
The big number:
- Aggregate financing was up 10.9% y/y – that’s up from 10.6% in May and the biggest print since June 2018.
So long-awaited monetary stimulus is finally kicking in, right? In a word, no. We see this as a blip, not a trend.
Check this out:
- New bank loan growth fell to 13.2% y/y – down from 13.4% in May and the lowest print so far this year.
Why that matters: The government has been actively trying to boost bank lending. The fact that it still decelerated is a worrying sign for credit growth going forward.
The jump in overall credit was due to less-fast contraction in shadow banking:
- Trust loan growth was -9.9% y/y in June – up slightly from -10.4% growth in May.
- Growth of bankers acceptances was -9.6% y/y – up significantly from -14.0% in May.
Get smart: Trust loans and bankers acceptances typically spike in June. That’s because liquidity always tightens as banks have to pass regulatory inspections – so they turn to short-term financing to see them through.
What to watch: The Politburo is set to hold an important meeting on economic policy before the end of the month. If we are going to see a change in policy, it would be then.
3. Central bank holds firm on monetary policy stance
On Friday, the People’s Bank of China (PBoC) held a press conference to discuss the credit data.
From the bank’s perspective, everything looks good:
- “At present, the liquidity of the banking system is reasonably ample.”
- “The scale of monetary credit and social financing is growing moderately, and market interest rates are stable.”
But the big question remains: How will monetary policy develop in H2?
Sun Guofeng, head of the Monetary Policy Department, underlined that a US interest rate cut is not the PBoC’s biggest concern:
- “It is necessary to adhere to the principle of focusing on self-centeredness – focusing on China’s economic growth and price changes to do timely adjustments and pre-adjustments.”
Sun also said that current credit growth is enough to support the economy:
- “In the past two years, M2 has grown in single digits.”
- “Although social financing has slowed down…it has supported the high quality development of the economy.”
Get smart: The PBoC is signaling that monetary stimulus is not on the horizon.
Get smarter: The Politburo meeting will have the final say on monetary policy, so keep tuned!
4.Data dump – trade
The customs bureau released monthly trade stats for JuneFriday.
- Exports fell by 1.3% y/y – down from 1.1% growth in May, and a little above expectations of a 2% decline.
- Imports contracted by 7.3% y/y – up from 8.5% contraction in May, but well below expectations of a 4.5% drop.
Quick take 1: Those weak imports point to a slowing economy.
Quick take 2: The trade war is starting to bite.
Quick take 3: Slowing global demand is adding to China’s trade woes.
The bottom line: Trade will continue to be a drag on growth in H2.
Reuters: China’s June exports, imports fall as trade war takes heavier toll
5.China 3 Vietnam
On Friday, Xi Jinping met with Chairwoman of the National Assembly of Vietnam Nguyễn Thị Kim Ngân.
Xi was all smiles, calling the two countries “comrades and brothers.”
Some context: Xi is all about socialist solidarity. Vietnam was the first state visit of Xi’s second term (see November 10, 2017 Tip Sheet).
Xi wanted to emphasize that the countries have “common interests”:
- “Both sides [should] enhance coordination and collaboration in international affairs for their common interests.”
Xi also broached the relationship’s most contentious issue – territorial disputes in the South China Sea (Xinhua):
- “[We] should act in line with the fundamental interests of [our] two countries and… safeguard peace and stability at sea with concrete actions.”
Nguyễn was receptive, though she did remind Xi of the sea’s “real” name (Vietnam News):
- “She said Việt Nam is ready to join China in settlement of the East Sea issue.”
Get smart: The China-Vietnam relationship merits close following. Both China and the US want to pull the country into their respective orbits. That makes the country a bellwether for geopolitical relations in East Asia.
Xinhua: China Focus: Xi calls on China, Vietnam to lift ties to new level
Vietnam News: NA leader meets Chinese Party Chief and President Xi Jinping
6.NDRC drafts regulations to improve business environment
On Sunday, the National Development and Reform Commission (NDRC) put out new draft regulationson the central government’s favorite topic – how to improve the business environment.
The NDRC’s promise:
- “Market participants will be treated equally in terms of rights, opportunities, and rules.”
We’ve heard that one before.
So what is new?
The regs focus on reining in errant officials. Going forward, local officials will be punished if they:
- Refuse, evade, or delay fulfilling their legal duties
- Restrict market entry or exit
- Restrict fair access to factors of production
- Encourage local monopolies
- Establish illegal approvals
- Issue policies that hinder fair competition
Policymakers are clearly worried that the new regs will frighten officials into inaction.So the new regs are also quick to point out:
- In case of failure or error, officials will be cleared of any wrongdoing so long as they did not break any laws andtheir actions were aimed at improving the business environment.
Get smart: Making officials personally accountable for interfering with the business environment is a potential game changer.
7.China threatens sanctions on US defense contractors
On Friday, Ministry of Foreign Affairs spokesperson Geng Shuang announced that:
- “China will impose sanctions on the US enterprises involved in…arms sales to Taiwan.”
Some context: The US administration recently notified Congress its intention to sell USD 2.2 billion worth of weapons to Taiwan, including:
- 108 M1A2T Abrams tanks, made by General Dynamics
- 250 Stinger anti-aircraft missiles, produced by Raytheon
- Oshkosh-made heavy equipment transporters
China is important to all those companies. Some examples:
- China is the third-largest market for General Dynamics’ private jet subsidiary Gulfstream Aerospace Corp.
- Raytheon is looking to merge with United Technologies Corp., which sells aircraft engines and elevators in China.
- Oshkosh-made fire trucks are used in more than 60 airports in China.
- Honeywell, which manufactures M1 Abrams tanks’ AGT1500 turbine, has a massive presence in China across multiple sectors, including autos, aviation, and control systems.
Get smart: China has threatened to sanction US companies over Taiwan arms sales before, but has never followed through.
Our thought: Might China be tempted to go through with sanctions to give them another bargaining chip in the trade war negotiations?