A race between government stimulus and damages from trade war
China’s overall economic performance in terms of GDP depends on whether fiscal stimulus and monetary easing are big enough and happening fast enough to offset the negative impact on exports and related manufacturing activity from the ongoing trade war.
As the Chinese government has put substantial stimulus and easing in place, the Chinese economy should not experience a deep contraction. Nonetheless, we are still revising China’s GDP downwards to 6.6% in 2018 from 6.7%. We expect 3Q and 4Q GDP to slow to 6.5% year-on-year and 6.3% YoY respectively from 6.7% in 1H18. This steeper slowdown in 4Q reflects our expectation of 25% tariffs on $200 billion of exported goods to the US becoming effective.
We retain our end-of-year USDCNY forecast of 7.0.
Trade war impact already reflected in July data
Fixed asset investment slowed sharply to 5.5% YoY in July from 6.0% YoY in June; mainly as a result of negative 8.7% YoY growth in transportation, caused by limited local government spending. Real estate could stay strong because in a trade war, the economy still needs investment growth, even if the government previously indicated that tightening measures were needed.
Industrial production growth stayed flat at 6.0% YoY in July, of which industrial robot growth slowed to 6.3% YoY in July. The steep slowdown of robot production growth started in June, where 7.2% YoY was registered, down from May’s 35.1% YoY. It seems that the trade war has deferred robot production, as exporters and manufacturers expect lower production order volumes.
Retail sales growth also slowed to 8.8% YoY in July from 9.0% in June due to negative sales growth in automobiles. Tariff cuts on imported automobiles (except for those from the US) may not have yet fed through to existing inventories at retail outlets, and until this clears, a mismatch in price expectations between consumers and sellers may weigh on car sales.