China's Economy Expands Moderately, and the U.S. Election Makes a Far-Reaching Impact
The findings of Taihe Economic & Financial Outlook (October, 2020) for the global financial and economic hotspots, China’s macroeconomic trends and financial market trends in September 2020 are as follows:
1. GDP growth rate in the third quarter was slightly lower than expected; consumption and investment performance was poor. Although the growth rate was slightly lower than expected, long-term economic recovery remains promising. Consumer spending drove GDP growth upwards by 1.7 percentage points, turning positive for the first time this year, and increasing of 4.0 percentage points from the second quarter; net exports of goods and services spurred GDP growth by 0.6 percentage points; venture capital boosted GDP growth by 2.6 percentage points, becoming the main driving force of economic development in the third quarter. In the medium term, the role of investment in driving GDP will probably remain stable.
2. The U.S. election will have a profound impact on China’s macroeconomy. From the macroeconomic perspective, whoever Trump or Biden is elected, the U.S. will introduce some economic policies that complicatedly impact on China’s macroeconomic performance. If Trump is re-elected, China’s foreign trade is expected to be harder hit. The trend in China’s foreign trade of continuing to exceed expectations might cease in the next one to two quarters in the face of the outbreak of the Covid-19 epidemic. Although China and the U.S. have reached a number of agreements, the outbreak of the epidemic is likely to lead Trump to make more radical decisions, with the possibility of tearing up the trade agreement and imposing further tariffs. If Biden is elected, the long-term risks facing Chinese economy are still unlikely to abate. In general, the impact of the changing situation in the U.S. on China’s economy cannot be ignored. In this environment, China needs firstly to consider the multiple difficulties faced by foreign trade so as to avoid the risk of the “external fluctuations” being transmitted to the “internal fluctuations”. Secondly, multiple factors such as imported inflation, shrinking foreign currency assets, exchange rate, and capital market volatility caused by the over-issuance of the U.S. dollar are also worthy of attention. We should be alert to the potential danger of the U.S. launching a “financial war”.
3. Review of price trends: In general, the changes in the CPI index are mainly related to the continued sluggish end demand of residents and the sharp drop in transportation and communication prices. Regarding the consumer price index, the Taihe Economic & Financial Outlook believes that in October 2020 and even during the fourth quarter, the increase in the CPI index is expected to be stable, returning to the “1 era”, and likely to remain so until the end of the year. The month-on-month decline and the year-on-year increase in the PPI are related to the narrower increase in production prices. Considering that overall industrial production is still recovering, the PPI is expected to rise gradually in the future.
4. Review of the trend in the manufacturing’s PMI: Overall, the PMI of China’s manufacturing industry has been above 50 continually. After the epidemic had been effectively controlled, China’s economy in the third quarter ended with a moderate expansion. However, seasonal factors brought about by the National Day and Mid-Autumn Festival have greatly enhanced the PMI data for this month. By analyzing the PMI-related data for manufacturing industry over the same period during the past five years, it can be seen that an overall increase in PMI data cannot be ruled out as a short-term phenomenon due to the approaching festivals. Major issues such as supply-demand gaps and sluggish recovery are still affecting the long-term health of the economy.
5. Review of foreign trade trends: After a sharp fall in the first quarter and a stabilization in the second quarter, imports and exports rebounded in the third quarter; however, the single-month import and export growth data in September 2020 may be volatile, and whether the recovery will continue remains suspicious. Exports in September 2020 continued their previous expansion, showing the strong resilience and positive growth in the sixth month. In terms of imports, mainly due to the improvement in the electronics and automotive industry chains and the increase in the imports of bulk commodities, the growth is sharply higher than expected in September 2020.
6. Review of industrial value added: During the implementation of the “six stability” and “six guarantees” policies, due to the excellent prevention and control of the epidemic, and the stable development of economy and society, industrial production maintains a steady growth. However, the current domestic and international economic situation is still complicated and uncertain, which has brought great pressure to bear on production and operation. It is worth noting that although the growth rate of China’s industrial value added has recovered to a certain extent, from the perspective of corporate profits, the year-on-year growth in total profit by China’s industrial enterprises above the designated size has long tended to shrink. The inefficiency in the upstream enterprises represented by state-controlled enterprises that cannot be solved in the short-term, and the mismatch between the products and the orders caused by the supply-demand gap are the main reasons for the weakening of the economic efficiency of industrial enterprises.
7. Social financing data showed positive changes in September 2020. In terms of RMB loans, the proportion of medium/long-term loans has gradually increased. On the whole, the growth in loans to the residential sector has benefited from a marginal improvement in consumption and real estate sales. The apparent increase in medium/long-term loans indicates that real estate companies are trying to stimulate sales to accelerate the return of funds. At the same time, the medium/long-term loans in the corporate sector also release a positive signal. The fading out of short-term monetary policy tools has basically kept pace with the recovery of financing needs of the real economy. Although there are still major problems in the financing structure, problems such as idle funds have been alleviated at the general level. The growth rate of M1 continued to rebound after the previous period of weakness. The cash flow crisis faced by most companies is gradually fading, and the liquidity problems of companies have been alleviated basically. M2 returned to an upward trajectory and this rebound was in line with expectations.
8. The main data of the bond market shows positive signals. The central bank’s excess supply policy in the past three months reflects the aim of stabilizing the currency, curbing the upward momentum of market interest rates, and alleviating the medium/long-term fund shortage. Despite of the overseas epidemic rebound, the trend of overseas economic recovery is still relatively stable, and it is not expected to have much of an impact on the China’s market. However, there will be an impact to a certain degree both in China and abroad in the short term with many uncertainties caused by the upcoming U.S. elections, including the changes in the U.S. medium/long-term economic and foreign policy, and the possible legal conflicts caused by the mailing votes.
9. The risk and uncertainty of the stock market are high. No major risk events have occurred over the National Day period. The full recovery of domestic tourism drove up consumption and led to positive sentiment, which in turn pushed the market upward. However, in mid-October, the epidemic rebounded again. At the same time, the third-quarter GDP and consumption data released on October 17 did not meet expectations. These caused a lack of upward momentum in the market and led to the downward pressure. In addition, the upward momentum of the U.S. stock market mainly came from President Trump’s recovery in his physical condition following his diagnosis of COVID-19. However, as the U.S. election is approaching, the market’s prudential sentiment has risen, and global stock markets may experience greater volatility in the short term. We advise investor to invest cautiously.
10. In terms of commodity prices, crude oil rose in the short term while ferrous metals fluctuated. Crude oil prices fell at the end of September due to the recurrence of the epidemic. However, the recent stimulus plan of the U.S. has eased the pressure on the U.S. dollar. At the same time, Russian President Putin signaled his support for production cuts, and thus the international oil price is rising and probably continues to rise in the short term. However, considering the impact of end demand and possible price suppression, the resistance for rise still exists. In terms of ferrous metals, the pressure of high volume and high inventory of rebar in the early stage was relieved in October. The decline of inventory has stimulated the increase in rebar prices. However, the total inventory of rebar is still high compared with last year. The high inventory pressure in winter may repeat this year. Also, with the unknown factor whether end demand can recover, the price of rebar is expected to fluctuate in the short term, whose long-term upward momentum is limited.
—————————————————————
ON TIMES WE FOCUS.
Should you have any questions, please contact us at public@taiheglobal.org
