the sprint into yields continues unabated by the further contracting of rates across the globe. The August lull in trade has created the ideal scenario for risk seeking as volatility remains low and news flow thin. While we don’t see any reason to swim against the current we need to stay vigilant of events that might derail the current risk euphoria.
Data released today indicates that China’s economic stabilization strategy is wavering slightly.
China’s July activity data in industrial production, retail sales and investments all disappointed pushing forecasts for GDP growth below 7.0%. Today’s data was not completely unexpected as PMI reads had shifted below 50 earlier in the month (China manufacturing PMI 49.9) and soft trade data release indicates that the economy is stressed. The Chinese consumer remains active but slower paced as annual retail sales rose to 10.2% (driven by a surge in passenger car sales increased by 23% y/y), against 10.6% prior read. Industrial production remains stagnant, rising an unimpressive 6.0%. Finally, urban fixed asset investment, which had been a bright spot for growth during Q1, declined to an annualized pace of 8.1% from 9.0%. The soft investment read reversed the prior uptick, which was driven by extensive government expansion program, continuing a worrying downward trend. Investment into state-own enterprises was elevated but turning lower. To make matters worse, private investment fell to a new record low at 2.1% as falling global demand hurt business confidence. As government policy is geared toward priming the investment pipes it is clear that official spending is not big enough to offset the contraction in private investment.
Setting policy mix has become significantly more complex as economic data has diverged and become regional. China’s housing markets remain firm as sales surged 18.7% y/y, yet suggests that households have ratchet up leverage.
The government has been vocal over concerns about a housing bubble, continuing to implement micro-turning measures; slow expansion, however, PBoC loose monetary policy encourages speculation. Moving forward, it is likely that the policy mix will increasingly skew towards targeted fiscal spending over direct easing. Given the risk form, shadow banking and rising financial leverage interest rate cuts and adjustment to RRR will become less frequent. We anticipate that so long as growth deceleration does not become unstable, monetary policy will remain accommodative with a probability of a 25bp cut in Q4. As for the CNY, decreasing expectations for PBoC action should allow CNY to firm.