China’s Economy Ends 2019 Brighter With Trade Deal in Sight
The manufacturing purchasing managers’ index remained at 50.2, according to data released by the National Bureau of Statistics.
(Bloomberg) -- China’s manufacturing sector continued to expand output in December, adding to evidence that the world’s second-largest economy is stabilizing as the signing of a phase one trade deal with the U.S. nears.
The manufacturing purchasing managers’ index remained at 50.2, according to data released by the National Bureau of Statistics on Tuesday. The outlook for export-oriented firms brightened, with a sub-index of new orders for export rising above the 50 mark for the first time since May 2018, production recovered for a second month and output prices narrowed their decline.
On the downside, the non-manufacturing gauge fell to 53.5 from 54.4, and an index of small manufacturing firms dropped after a strong rebound from the previous month.
China’s economy appears to be reaching the bottom of a cyclical slowdown as 2019 draws to a close, aided by the prospect of an agreement that will prevent further tariff increases on goods shipped to the U.S. and de-escalate a trade war that’s battered the global economy. Domestic stimulus efforts, ranging from tariff cuts to support for infrastructure spending, are also buoying sentiment.
The White House’s leading China hawk, trade adviser Peter Navarro, said Monday that the preliminary trade deal reached earlier this month with Beijing is completed.
“That’s a done deal, put that one in the bag,” Navarro said on Fox News.
Lunar New Year
He declined to confirm a report by the South China Morning Post that Chinese emissaries led by Vice Premier Liu He will travel to Washington this weekend to sign the accord.
In his New Year’s Eve speech, President Xi Jinping said he expects 2019 gross domestic product to be close to 100 trillion yuan ($14 trillion) and GDP per capita this year should reach $10,000. He did not mention the trade tensions with the U.S.
The upcoming Lunar New Year has boosted the domestic market while the Christmas season bolstered overseas demand, according to a statement by the China Logistics Information Center, which helps compile the data. News about a phase-one trade deal has stabilized market confidence and expectations, which benefits both imports and exports, it said.
The reading “reflects the continued recovery of manufacturing confidence due in part to the easing of U.S.-China trade tensions,” Yingke Zhou, a China economist at Barclays Capital Asia Ltd in Hong Kong wrote in a note. “We remain constructive on a near-term recovery,” and the central bank will likely announce a cut in banks’ reserve ratios as early as this week, he said.
The economy still faces strong growth headwinds into 2020 as the private sector struggles to access cheap funding and the large amount of outstanding debt limits the scope of government spending.
What Bloomberg’s Economists Say...
Our concern for longer-term economic slowdown remains. In the domestic market, private sectors are still facing difficulties in funding and consumption may remain sluggish. For external sectors, heavy U.S. tariffs remain in place, and the trade talks with the U.S. will be crucial for economic outlook. We maintain our view that the central bank has more easing to do, though probably less so than it appeared to be a month ago.
-- David Qu, China economist
For the full note click here
Economists had forecast a slight decline in the PMI reading after a strong rise in November. Bloomberg’s deck of the earliest indicators for the month however had foreshadowed the rise.
Upside Factors
Signs have gathered since November that the deceleration in the economy was reaching an end for now.
- Infrastructure investment will likely recover as local governments start selling debt from Jan 2, earlier than previous years
- Consumption will receive support in 2020 on efforts to eliminate poverty, and auto sales have seen narrowing declines in recent months
- Exports could get a lift on the rollback of U.S. tariffs on Chinese goods and a low base
- Production gained steam in recent months, and analysts expect some sectors to start a re-stocking cycle of inventory that could drive up demand and prices
- Overall borrowing costs by businesses will likely fall when all the loans are priced with the loan prime rate, the new pricing reference, by August
The downside factors point to the challenges ahead for policy makers
- The rebound in infrastructure investment could be challenged as local government fiscal power remains tight and off-balance-sheet borrowing continues to be restricted
- Robust credit growth may have been overstated
- Small banks and local government financing vehicles face relatively high financial risks
- The high base from early 2019 could weigh on economic data in the first quarter of 2020
On balance, economists are upgrading their forecasts, with the consensus currently seeing an expansion of 5.9% in 2020, in line with the gradual slowdown desired by policy makers.
“Considering that the global manufacturing cycle may continue to be on the mend, property-related policies may loosen on the margin, and credit expansion may be propped up by a pro-growth PBOC, it is likely for the recovery in cyclical momentum to carry into early 2020,” economists including Yuan Yue at China International Capital Corp. wrote in a note.
--With assistance from Miao Han, Lin Zhu and Dandan Li.
To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Sharon Chen
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With assistance from Bloomberg