Supported by Digital Infrastructure, China's Economy Will Make Steady Progress in the Medium-to-Long Term
Key Findings
Taihe Economic & Financial Outlook’s analysis of China’s economic data in March 2020:
1. The trend in prices characterized by significant inflation in food prices, moderate inflation in non-food prices, and PPI deflation will continue. The CPI has continued a year-over-year increase, which is mainly caused by the increase of food prices, particularly pork prices. The PPI is under deflation, mainly due to discouraged commodity prices such as oil and natural gas, and shows a moderate inflation after excluding food prices.
2. For the first half of the year, the PMI is not expected to return to the level observed in the same period of last year. Although China has taken the lead in controlling the COVID-19, the international community is still in its early stages. The decline in global demands will strike the global industrial chain, slow down the recovery of manufacturing industry’s PMI, and adversely affect economic growth in China.
3. Industrial value added has rebounded slightly. Due to the COVID-19, the three major categories of industrial value added have shown negative growth in February, with manufacturing industry falling the hardest. Industrial value added in March will perform slightly better than that in February.
4. We should not resort to massive fixed assets investment to stimulate the economy. The growth rate of fixed asset investment has bottomed out due to the weak demands, and that of manufacturing and infrastructure investment is under the most downward pressure. The current investment policy aimed at debt control should not be abandoned. Although we can adjust the directions of investment, the total amount of investment should not be expanded too much. Real estate investment growth is slowing down, but still shows resilience.
5. Consumer expenditure has shrunk significantly. Retail and wholesale sector consumption and non-essential goods consumption have all fallen sharply due to the outbreak. 5G, among other areas, will become the key area for growth. However, traditional consumption is still irreplaceable in the short-term, which should be paid close attention for its active role.
6. The period of trade contraction will last till the second half of the year. The exports and imports, both in RMB and USD terms, have fallen in March. It is expected that China’s imports and exports will still be frustrated during the first two quarters of this year.
7. Overall monetary easing will continue throughout the year. The data released in March 2020 shows that non-standard financing and government bonds have dragged down total social financing (TSF), while corporate bond financing has been supportive. The growth rate of total social financing is slightly lower than expected, reflecting COVID-19’s impact on the real economy. The M2 growth rate has rebounded, reflecting the positive effect of counter-cyclical policies. With regard to small and medium-sized enterprises and severely affected industries, the fiscal policies and credit policies need to be further refined, in order to ensure the continued and stable growth in small and medium-sized enterprises, as well as to stabilize employment.
Taihe Economic & Financial Outlook’s analysis of the global financial markets:
1. Stock markets in Europe and the U.S. have witnessed substantial fluctuation. Although the overall performance of the European and U.S. stock markets was relatively stable before mid-February, the markets fell sharply during the second half of the month due to the impact of the COVID-19 and the problems within their own financial systems. The reason for the bear market in the U.S. is more complicated. The collapse of the market may trigger a new round of U.S. debt crisis, and possibly even an economic recession. The main reasons for the recent decline of China’s stock market are the global economic downturn caused by the spread of the COVID-19 plus the crisis of U.S. capital market, which make it difficult for A-Shares market to escape from the impact in the short term. In the medium-to-long term, with China’s economy showing sustainable and steady growth, Taihe Economic & Financial Outlook is optimistic about A-Shares market’s future growth despite the global downward trend.
2. As for the bond market, further decline will be limited in the short term in terms of the interest rate of the government bonds. On the one hand, the possibility of further monetary policy easing in the short term is relatively small; on the other hand, the marginal effect of further easing is also relatively weak under the relatively ample liquidity. The global bond market has been dominated by the panic caused by the pandemic, the expectation of economic downturn and the monetary policies of central banks around the world since February. Currently, the bond market in China is lack of opportunities for large-scale investment. If bond investors wish to get excess return, they may have to choose those high-yield bonds or seek opportunities overseas. It is expected that in the first half of 2020, the opportunities in the China’s capital market will lie in stock market rather than in bond market.
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