Consumption Remains Weak and Investment is Rebounding
Key Findings
The findings of the Taihe Economic & Financial Outlook (September 2020) on global financial and economic hotspots, China’s macroeconomic trends, and developments in the financial markets in August 2020 are as follows:
1. Review of the U.S. monetary policy. The statement of the U.S. monetary policy made in September by the Federal Reserve was in line with general market expectations, but it did not bring benefits to the U.S. financial markets. The future financial markets of the U.S. depend on a definite economic recovery or a monetary policy exceeding expectations. However, with great uncertainties about the recovery in the U.S. economy, an excessively loose monetary policy leading to a quick depreciation of the U.S. dollar, will increase the credit risk of dollar assets, which will inevitably lead to capital outflows. Its monetary policy that is in line with market expectations is essentially a signal of tighter margins.
2. Review of the flow of funds in global financial markets. According to our analysis, the U.S. financial markets have positively interacted with those in European countries. Under the current circumstances, it is the loose monetary policy that supports the market rather than the real economy, and there’s fairly limited motivation for capital to flow into the financial markets. Besides, the COVID-19 pandemic has been effectively controlled in Asian countries, among which China has recovered fastest in the real economy. Although its fiscal policy is expected to be tightened, China’s real economy has gained positive market expectations, and attracted more international funds.
3. China’s export data has again exceeded expectations. China’s export continued to maintain a strong growth trend in August, mainly because of the rising demand in overseas markets due to the resumption of work and production. Although the proportion of medical supplies in exports continued to decline slightly, it remained the major contribution to high export figures. It should be noted that due to the China International Import Expo (CIIE), non-economic factors caused a quite big impact on the trade data this month.
4. Review of price trends in Chinese products: In August 2020, the CPI growth rate dropped slightly, while the PPI index continued to rise, showing a certain level of convergence. The change in the CPI index is mainly due to the failure to boost the end-market demand and the sharp decline in pork price growth; the continued narrowing of the decline in the PPI index is related to the drop in the price of production materials. Taihe Economic & Financial Outlook believes that fluctuation in the prices of bulk commodities and oil is also a major factor.
5. Review of China’s investment trends: From January to August 2020, the growth rate of fixed-asset investment continued to rise, mainly because of the strong rebound in real estate investment. Despite the general policy of “houses are for living not for speculation”, the current weak consumption and the increasing uncertainties in foreign trade highlighted the role of fixed asset investment in promoting the economy. There are many hidden dangers when economic growth relies too much on the real estate investment. However, under the current background of slow recovery in demand, the investment growth rate in the third and fourth quarters is still expected to see a steady rebound or even exceed expectations.
6. Review of consumption trends: The data for retail sales of goods is in line with expectations, but severe problems still exist in China’s consumption. The problems of instability in end-market demand will become the most serious obstacle limiting China’s further economic rebound in the long run. The recent continuous downturn in the consumer market is not only the result of the severe impact of the pandemic, but also due to the lack of fundamentals which is the key factor for restricting consumption. The expansion of leverage in the residential sector and excessive debt have further restricted the recovery of end-market demand. Although consumption-upgrading products have accelerated their recovery in August 2020, consumption data averaged by upmarket products cannot be evidence of the recovery in demand. From the proposal of the domestic big cycle, if a structurally differentiated consumption market cannot re-emerge, the end-market demand will become a major fault line in the cycle.
Review of significant topics
Hotspots in financial markets
1. Analysis of U.S. fiscal decision-making: In Taihe Economic & Financial Outlook (August 2020), we conducted a quadrant analysis of U.S. policy based on the results of the U.S. presidential election and the pandemic, and discussed the policy differences between Trump and Biden if either of them won the election. In addition to their differences in policy, we should also note the possible similarities between the two potential administrations, that is, on some issues, the views of the two candidates are not completely opposed to each other.
First, in terms of their attitudes towards U.S. monetary policy, both Trump and Biden clearly recognize that the current U.S. economy is in a serious recession with no clear signs of recovery. Therefore, although the monetary policy conducted by the Federal Reserve has already been loose enough under Trump’s administration and will continue to be loose for a long time due to the pressure exerted by the Trump administration. Even if Biden comes to power, there is a high probability that loose monetary policy will continue. In addition, the U.S. has maintained a loose monetary policy for a long time. The Federal Reserve has substantially expanded its balance sheet since the global financial crisis in 2008. After a temporary and minor reduction in the balance sheet last year, the Federal Reserve expanded it significantly again this year. In these circumstances, the U.S. financial market has been oversupplied with assets at inflated prices. It is hard for the Federal Reserve to find an easy way to abandon the easing policy, for it would lead to violent turbulence in the U.S. financial market, or even a new and more serious financial crisis. Therefore, in terms of monetary policy, whether Trump or Biden is in power, their policies to U.S. monetary won’t significantly differ from one another.
Trump and Biden also hold the same attitude towards China. Although they act differently, both Trump and Biden will take the development and international status of the U.S. as their primary goal. Therefore, even if Biden wins the election, and eases China-U.S. trade tension, competition in key areas and the policy of containment of China will not change.
In terms of its national policy, the Federal Reserve announced its September Monetary Policy Statement at 2 p.m. Eastern Standard Time on September 16th. At the final Federal Reserve meeting before the election, the Federal Open Market Committee decided to maintain the benchmark interest rate within the target range of 0-0.25%. It will remain unchanged until the inflation rate reaches an average of 2% over a period of time, which is in line with broad market expectations. However, this announcement received an underwhelming market response, with the slight rising of Dow Jones Index. This shows that easing policies which just only meet the expectations of market cannot bring further impetus to the U.S. financial market, and a real stimulation in the market will only occur when there is hope of economic recovery, or a new loosening of monetary policy that exceeds expectations. However, any U.S. economic recovery would be highly likely to slow down due to the COVID-19 pandemic, and implementing an easing of monetary policy beyond people’s expectations is not possible. As the national debts in the Federal Reserve are large in number, if the policy is much too loose, thus leading to an overly fast depreciation of the U.S. dollar, the credit risks of the dollar will rise up, and capital outflow is bound to happen. Also, easing policies within people’s expectations have already been a symbol of the marginal tightening trend. Therefore, before the pandemic is under control, U.S. fiscal policies will remain the same as what has been mentioned in this meeting, i.e. maintaining a loose monetary policy, mitigating the negative impacts of the COVID-19 pandemic as best as they can, and implementing policies which are helpful for economic recovery after the pandemic.
2. Analysis of the flow of funds in global financial markets. In view of the different situations among countries during the pandemic, Taihe Economic & Financial Outlook has divided the major financial markets into two parts according to geographic location: the European and American markets, and the Asian markets. Then we make an analysis of fund flows respectively. European countries and the U.S. have been hit harder by the pandemic and enjoy high market inter-connectivity. It is the easing in monetary policy, rather than the co-recovery of real economies, that supports and sustains these markets. That is the reason why capital has quite limited motivation to flow into the financial markets of these economies. On the contrary, Asian countries have performed better in combating the pandemic. Among Asian countries, China witnessed the fastest economic recovery. Though the fiscal policy has been tighter than expected, China’s real economy is believed to be positive and has attracted more international funds.
Let’s take the flow of international capital into China as an example. First, funds have been observed to flow into the stock market. Watching various indices of the international balance of payments, such as Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, we can see that as of September 24, China’s cumulative net inflow of northbound capital reached 1.78 trillion Chinese Yuan (CNY), southbound 2.14 trillion CNY, and the growth rate in both directions remained consistent before and after the pandemic. Also, the preliminary data on China’s balance of payments for the second quarter and first half of 2020 released by the State Administration for Foreign Exchange showed that the net errors and omissions in China’s current account balance of payments returned to negative values in the second quarter of 2020, that the absolute value reached 536.2 billion CNY, and “lender preference” emerged, indicating that hot money was flowing into China again, a strong indicator of a tendency for global financial capital to flow into China’s stock market.
Another perspective from which to observe the flow of funds is the bond market. Channels for foreign investors entering China’s bond market include the traditional China Interbank Bond Market (CIBM), Qualified Foreign Institutional Investor (QFII), RMB Qualified Foreign Institutional Investor (RQFII), and the newly established Bond Connect. Although the Bond Connect is a new channel, it has become important for the use of incremental bond funds, and foreign investment has shown a “net holding increase” in all Bond Connect channels. Judging from this perspective, the market data trend of Bond Connect can represent the overall tendency of China’s bond market to a certain extent. According to the data disclosed by Bond Connect, in August 2020, the statistics for the Shanghai Clearing House and the Central Clearing Company showed that the total amount of overseas bonds held by Bond Connect had increased to 2,829.9 billion CNY, with a monthly growth rate of about 5%. Thus, it seems that, in addition to the stock market, the trend of external capital flows into the Chinese market is also reflected in the bond market.
Hotspot review of global macroeconomic trends:
1. Export data exceeded expectations again. In August 2020, China’s trade import and export indicators continued to improve. According to the data released by the General Administration of Customs China’s total foreign trade imports and exports in August reached 2.88 trillion CNY, up by 6% compared to the same period last year. Among them, exports achieved double-digit growth for the first time, up by 11.6% compared to the same period last year, the highest growth rate since 2019. The value of imports reached 1.23 trillion CNY, a 0.5 % year-on-year decrease.
Exports continued growing rapidly in August, mainly due to export demand driven by the resumption of work and production in overseas markets. Although the exports of medical materials as a share of total exports continue droping slightly, they were still large in scale and played the role of supporting the entire export. In August, China’s Containerized Freight Index (CCFI) rose by 2.1%, including a 5.0% increase in the U.S. West Coast routes. This shows that overseas markets, especially the U.S. market, are recovering gradually, and demand for traditional export commodities is recovering steadily.
But it should be noted that due to the upcoming China International Import Exposition non-economic factors are playing a much more important role in China’s imports. Therefore, the actual import figures are a little higher than expected by analysts in related industries.
2. The sustainability of the trade rebound is doubtful. In August, the growth rate of supplies for pandemic prevention and control declined. The growth rate of textiles, including masks, though lower than 48.4% in July, still represented a 46.9% growth compared to the same period last year; medical equipment represented a 38.9% year-on-year growth. The substantial growth in the export of pandemic prevention and control products gave a considerable boost to overall exports, but base numbers for medical supplies and textiles also increased. As soon as the pandemic is brought under control next year, overseas market demand will decline, and this year’s high base number could become a reason for slow export growth next year, or even drag down the overall export data.
At the same time, pandemic prevention and control supplies played a huge role in boosting China’s export volume in the second half of this year. As the situation in epidemic control gradually improves, one major difficulty China will face next year is to find a new growth pole and to maintain stable export growth.
In terms of commodities, China’s trade in ferrous metals maintained the previous import growth and export decline. Since January this year, China has imported a total of 2.24 million tons of steel, a 130% year-on-year increase. Steel imports grew rapidly, mainly because the global manufacturing industry was significantly affected by the pandemic, and as demand fell sharply, so did the price of steel. China used to be a net exporter of ferrous metals, but many domestic enterprises now choose to import raw materials thanks to low steel prices.
In terms of non-ferrous metals, China’s trade volume, particularly the import of this industry, continued falling sharply, with the policy banning the entry of “foreign garbage”. China’s import of crude oil from May to August this year hit a new record high. With the last batch of crude oil waiting at ports coming ashore in September, it is expected that the rising import of China’s crude oil will come to an end in October.
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