Structural Data in the First Quarter Signaled a Positive Outlook
Summary of the main points of the report
The analysis in the Taihe Economic & Financial Outlook (2020, April Issue) of China’s economic and financial data in March and the first quarter of 2020 is set out below:
1. The magnitude of the decline in China’s GDP under the impact of the COVID-19 epidemic in the first quarter of 2020 was in line with market expectations. In the context of the global spread of the virus and the continued weakness of the global economy, it has become more difficult to achieve the goal of “doubling the GDP”. Nevertheless, there were evidences of some positive signals in March. Under the influence of the epidemic, the economic structure was clearly divided, and the service sector became the main driving force of GDP in the first quarter. From the perspective of demand, investment in high-tech industry became a new bright spot, but consumer demand was still uncertain.
2. The CPI in March 2020 returned to the “4 Era”, and the risk of prices rising out of control has largely disappeared. The recovery of pork supply and the downturn in demand will lead to structural deflationary risks; meanwhile, the prices of manufactured goods are unlikely to strengthen greatly in the context of weakened retail consumption and will probably continue weakening. In 2020, the CPI is expected to show a rising trend at the beginning of the year and then fall gradually.
3. Assisted by the continued improvement in domestic epidemic prevention and control effects, among others, the March manufacturing PMI rebounded above the “50% threshold”. The global industrial chain is still changing, and monetary policy needs to avoid the “interest rate trap”.
4. The magnitude of the decline in industrial value-added was substantially reduced. After nearly two months of stagnation in production activities during the epidemic, China’s industrial growth rate is gradually returning to the normal track. However, it is worth noting that regardless of the unstable domestic demand that had already occurred before the outbreak, or the global economic recession during it, the problem of global overcapacity will still restrict China’s industrial development to a certain extent.
5. Given that the direct impact of the outbreak is fading, from January to March 2020, the rate of investment growth in China began to rebound after reaching its nadir. However, the growth rate of investment in manufacturing industry has still been very low. While infrastructure investment can support the economy to a certain extent, it alone is difficult to fully remedy the recession of consumption and trade.
6. Aggregate consumption continued to shrink, but the magnitude reduced. Consumption of daily necessities continued to show sluggishness, while the growth rate of optional consumption continued to decline on a year-on-year basis; online consumption shrank only slightly, reflecting the substitution effect of consumption channels to some extent.
7. In terms of trade data, the “time lag” between China and foreign countries’ epidemic prevention and control pushed up China’s foreign trade data in March 2020. However, the impact of the global spread of the virus on the trading chain will last for at least 12 months. Global trade will face its most difficult post-cold-war period in the next two to three quarters. China’s international trade may not be able to continue the growth trend seen in March 2020, and the recessionary trade surplus will gradually shrink.
8. In terms of financial data, the figures released by the central bank in March 2020 showed improvement. The growth rate in social financing, loans, and M2 exceeded expectations. However, the widening of the interest spread between deposits and loans and the intensification of financial discrimination will lead to “idling of capital”. In the future, targeted supervision and investment of funds will be strengthened.
Taihe Economic & Financial Outlook’s interpretation of global financial market trends from March to mid-April 2020 is as follows:
1. With regard to the bond market, in the context of the overseas epidemic outbreak in March 2020, domestic bond yields further declined, but, considering trends in 10-year treasury bond yields, the market still shows confidence in medium and long-term economic growth, and attention should be paid to the supply of interest rate bonds after the “Two Sessions”(the two most significant annual legislative assemblies of the Chinese central government). In the case of a large supply of a long-term bond, market sentiment may tend towards caution. As long as the direction in monetary policy is not changed, long-end interest rates will still have rooms for further decrease, but in the process, we should pay attention to the risk of gradual amplification of volatility.
2. In terms of the stock market, from March to mid-April 2020, due to the impact of the epidemic and oil prices, the European and U.S. stock markets first plunged, then fluctuated upward, showing a deep V-shaped path; U.S. stock market caused fluctuations in Asian stock markets, which witnessed sharp falls followed by a weak recovery. U.S. stocks have already rebounded but will come under great downward pressure in the future. The U.S. stock rally, which began in late March, was founded on the Federal Reserve’s strong and determined efforts to prop up the market, which has responded positively. Therefore, the Federal Reserve’s gradual reduction in asset purchases and repurchases in the second quarter is an event that will, in all probability, reoccur. On the A-share side, the short-term factors have not been fundamentally changed. As confidence is being repaired on the capital side, a large amount of capital inflow is not expected in the short run, and the A-share transaction volume will be in the low to medium range. Currently, in the A-share market, various long and short-term factors are intertwined, and the turning point for positive trading opportunities has not yet arrived. In the short term, it is likely to continue to fluctuate within the range of 2700-2900 points.
3. In terms of commodities, the recent trend in gold prices has been similar to that during the 2008 financial crisis: U.S. stocks started by going bearish, with gold prices soaring; and then, due to liquidity problems, sales were switched to U.S. dollars, with gold prices falling sharply; finally, the liquidity crisis subsided and gold became a safe-haven asset, with prices going upward again. The drop in gold prices in mid-March was seen as a result of a short-term liquidity crisis, which did not change the long-term factors of continued rise in gold prices. In terms of crude oil, from March to mid-April, crude oil prices showed a volatile downward trend, the root cause of which lay in the epidemic’s adverse impact on global economic growth and decline in demand for oil. In the short term, given the sharp contraction of global oil demand affected by the outbreak, short-term fluctuations in the crude oil market are expected to continue to increase. The risk of recent position-shifting is also worth paying attention to, and in our view, the prospects for oil prices in the short-term are negative.
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