Communication

Fears of a Chinese hard landing are overdone

China’s yuan devaluation and the Caixin PMI, which is composed of smaller and more export-oriented manufacturing firms than the official survey, have been two catalysts of the plunge in global stocks, as growth concerns in China are intensifying. We do not however share the view that Chinese growth will slump sharply.

The PBoC will continue to help stabilize growth, along with other government policy measures, and already announced yesterday (25 August 2015) an interest rate cut on its lending rate by 25bp to 4.60% and on the Reserve Requirement Ratio by 50bp to 18%. While the latter is intended to release liquidities in the banking system to make up PBoC’s dollar interventions to support its currency, the former will channel low financing costs to the real economy.

This action from the PBoC calls for others as real lending rates remain high, the previous rate cuts having compensated the fall in inflation. In this regard, the central bank communication has changed and indicates a more flexible monetary policy going forward, with further easing likely if the situation were to worsen. Also, the ceiling on deposits with maturities longer than 1 year has been removed which indicates that China is continuing its structural reforms despite market disruptions.

While the broad-based weakness in the manufacturing survey is clearly worrying: new orders and new export orders – two leading indicators – fell 0.9 point to an average of only 46.2, the second weakest reading since April 2009, this weak PMI survey is also the consequence of the port explosion in Tianjin and the temporary shutdown of factories to reduce pollution. We note also that other indicators than manufacturing are more positive. In particular, the real estate market is showing signs of improvement, the service sector is stabilizing and infrastructure investment is rising. As for the housing sector, national statistics report that home sales increased more than 20% in July while real estate investment is showing sign of a turning point. Thus the biggest risk to Chinese growth – an implosion in housing – has actually decreased.

 

 

Gero Jung, Chief Economist

Valentin Bissat, Economist / Strategist,