Volatile Domestic Financial Market and Accelerated Trend of Regionalization in International Trade
Key Findings
Taihe Economic & Financial Outlook (November 2020) has its focus on the following issues:
— An overview of the international financial and economic “hotspots” during the past month (October 2020), and
— Analysis of the trends in China's macro-economic and the global financial marketplace.
1. Series of credit defaults struck unease about China’s domestic financial market.
A series of defaults issued by AAA-level state-backed companies along with a suspected "debt evasion" investigation have sent shock waves rippling through the Chinese financial markets. Due to the volatile domestic fixed-income market, triggered in large part by these outstanding bond issues, a variety of bonds performed poorly in October. In the short term, the debt market is expected to be more volatile as the risks of uncertainty are still high.
Although investors may “fret” and thus be more cautious about additional bond defaults, which has caused broader market contagion, more regulations will certainly be required. The domestic stock markets in Shenzhen and Shanghai are expected to have increased short-term volatility while the long-term performance remains positive.
In addition, the U.S. markets have reacted quickly to the Trump presidential election campaign team’s eventually failed attempts to overturn the 2020 presidential election results. Commodities have been performing well since late October, with non-ferrous metals and coal playing a leading role. Coal, as a typical procyclical commodity, has been in great demand in China for a long time.
Coal price shows significant cyclical property. Demand for coal rises up in winter; the COVID-19 is now spreading uncontrollably throughout the international community, making the uplift of imported coal. In the meanwhile, the suppression from the Chinese central government on coal prices is expected to ease; and the anti-corruption efforts in Inner Mongolia have rocked coal production. All these effects contribute positively to the coal price.
2. A clearer trend on the regionalization of international trade.
Taihe Economic & Financial Outlook has predicted that, "global trade will eventually transit to regional trade". The signing of the recent Regional Comprehensive Economic Partnership (free-trade agreement between the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam) ushers in an exciting new era of regionalized international trade. The signing of this historic agreement by these Asia-Pacific nations provides enormous momentum to China's long-term import and export trade.
Here’s why:
— The signing of the RCEP is expected to further accelerate the transformation of trade between China and ASEAN countries from a simple "raw material-finished product" trade relationship to an advanced "raw material-intermediate product-finished product" complex chain, and facilitate a deep integration of the trade chain and the industrial chain.
— Besides the ASEAN countries, the key China-Japan-South Korea trade partnership is expected to receive more attention, and
— In the context of intense China-U.S. trade relations and the continuing worsening COVID-19 pandemic that is rampaging across the U.S., this new RCEP serves as an important economic buffer for the Chinese economy.
3. Commentary on the trend of price.
Overall, China’s CPI inflation fell sharply in October 2020 and the PPI inflation remained the same level as it’s in the previous month. The gap between the two continued to narrow. The CPI Index changed in most parts because of the price decline of pork as well as in the transportation and communication sector. The PPI month-on-month increase fell back while remaining flat year-on-year, indicating a decline of activities from the production side.
At the same time, changes in the residential sector and industrial production prices are simultaneously impacting international oil prices. In terms of the CPI, considering the deflation of the residential sector far exceeds the predicted level from Taihe Economic & Financial Outlook, together with the actual demand of the residential sector and the social financial data in October 2020, Taihe Economic & Financial Outlook believes that the downward trend in the price of the residential sector will continue until the first quarter of 2021.
In the case of the PPI, although the production side has shown signs of slowing down, overall industrial production is still recovering. With the rebound of international commodity prices, there is still a possibility that PPI will increase in the near future.
The obvious differentiation in product prices, and the slow recovery of consumption are likely to further drag down prices, thereby impacting the overall PPI trend.
4. Commentary on the trend of manufacturing PMI.
Although the PMI in October 2020 dropped by 0.1% from the previous month, it remained over 50% for eight consecutive months since March and at more than 51.1% since July, indicating the manufacturing industry is still in a stable expansion.
The recovery trend of the non-manufacturing market has accelerated as the business activity index in October hit a year-on-year record high. In the future, Taihe Economic & Financial Outlook sees import demand remaining positive, so the pressure on the demand side has been relatively eased as the sustainability of economic recovery throughout China looks stable.
5. Commentary on the trend of industrial value added.
Taihe Economic & Financial Outlook believes that the fault line between finished products and orders caused by the gap between supply and demand sides remains the main reason for companies’ low economic profits.
Once resumed production is unable to effectively fill in the need from new orders, industrial enterprises will lose the fundamentals of improved efficiency. The recovery of upstream companies will be dragged down by downstream demand so the sustainability of industrial rebound is still unstable.
6. Commentary on the trend of investment.
Overall, the growth rate of fixed-asset investment continued to pick up from January to October. The driving force for this increase relies on a continued strong real estate investment. Under the current background of "houses are for living rather than speculation", the overall weakness in consumption and the uncertainty of the continued increase in foreign trade highlighted the role of fixed asset investment in supporting the economic growth.
Although there are many hidden dangers in relying too much on real estate investments to stimulate the economy, Taihe Economic & Financial Outlook believes that under the current circumstances where overall demand is difficult to pick up, the investment growth rate in the fourth quarter still has fundamentals to rebound steadily and may even exceed the expectations.
7. Analysis of the trend of consumption.
In October 2020, consumer demand gradually picked up, and seasonal events such as the Mid-Autumn Festival, National Holiday and the preheating of Double Eleven contributed partially to this growth of consumption.
However, there is still a big gap comparing the current growth rate with that prior to the pandemic. Concurrently, combined with the continuous rapid availability of credit, total social financing and leverage expansion in October, the crowding-out effect of debt on consumption since August is expected to continue.
Given the slow growth of per capita disposable income and the relatively low consumption marginal propensity, the future growth rate of consumption is still a major concern.
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