China: A mild recovery in sight


Real GDP growth stabilized at 6.0% in 4Q19 and brought full-year growth to 6.1% in 2019.
Nathan Chow, Samuel Tse20 Jan 2020
  • Real GDP growth stabilized at 6.0% in 4Q19 from a recovery in domestic activities in December
  • Full-year growth was 6.1% in 2019
  • Implication to our forecast: We expect another orderly growth slowdown to 5.8% in 2020
  • Implication to our investor: Liquidity injection should fuel upward pressure on asset prices
Photo credit: AFP Photo


Real GDP growth stabilized at 6.0% in 4Q19 and brought full-year growth to 6.1% in 2019. The key driver was investment which contributed 1.9%pts to GDP in 4Q, up from 1.2%pts previously. For December, it went up to 5.4% YoY after having stayed at 5.2% for two months on liquidity injection.

Thanks to monetary easing, private sector investment accelerated a second consecutive month to 4.7% in December from 4.4-4.5% in October-November. Growth in total social financing was steady at 10.7% YoY in December; slower growth in outstanding bank loans was offset by a smaller contraction in shadow financing. New yuan loans were also stable at 12.3%. The main drag from short-term corporate loans was balanced by the recovery in corporate bills long-term corporate loans. Household loans continued to improve on robust mortgage demand. The uptick in money supply suggested an ongoing recovery in domestic demand. On the fiscal front, infrastructure spending will speed up in 2020 as reflected by increased local government bond issuances (up 4.8% in 2019). Special bond issuance had already begun in January. Accelerating commodities imports also pointed to more infrastructure investment ahead.

Industrial production rose by 6.9% YoY in December, up from 6.2% in November. Manufacturing industries growth picked up to 7.0% from 6.3% on the suspension of additional tariffs. Among all, auto production growth surged to 8.1% from 3.7%. China and the US signed a Phase One trade deal on January 15. While positive for market sentiment, the deal would only provide temporary relief to softening industrial activities.

The outlook remains cautious. US has maintained tariffs on USD370bn worth Chinese exports. More importantly, China’s hefty commitment to purchase an additional USD200bn worth of US goods and services by end-2021 will be a drag on its current account surplus. The threat of sanctions on tech remains. Core disputes such as intellectual property protection, state subsidies and greater financial market openness are unresolved and left to Phase 2 negotiations.

Retail sales growth was resilient at 8%. Auto sales rebounded to 1.8% after 5 straight months of YoY drop. Demand for luxury products such as gold, silver and jewellery also saw notable improvement. However, the consumption outlook remains clouded by the weak labour market. Hiring sentiment remained tepid on cloudy factory production outlook. Employment PMIs persistently stayed in contraction zone and jobless rate in urban areas stayed above 5% for 12 months in a row.

Elevated housing costs should also reduce available income for consumption. Property prices have risen for the 56th straight month in December.

As a result, more easing is needed to stabilize growth. Domestically, the private sector continued to suffer from high entry barriers and financing difficulties. Mild core inflationary pressures will provide PBoC more room to maneuver. Beijing’s tolerance for leverage will be higher in 2020 to fulfil policy and growth targets (see “China: More PBOC cash injection ahead”, January 16).

In retrospect, PBoC's monetary policy in 2019 was less proactive compared to global peers. The yield differential between Chinese and US 10Y sovereign bonds has widened by 60 bps in 2019 and was last at 127 bps, above the 80-100bps gap preferred by Governor Yi Gang. Over the course of 2020, we are looking for a 40bps cut in 1Y Loan Prime Rate and more reductions in the banks’ require reserve ratio to achieve an orderly growth slowdown to 5.8% this year while supporting asset prices.


To read the full report, click here to Download the PDF.


Nathan Chow

Strategist/Economist
nathanchow@dbs.com


Samuel Tse

Economist - China & Hong Kong
samueltse@dbs.com

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422