China’s data might be a bright spot on the calendar

Industrial production, fixed investment and retail sales data for January-February will come out in China on Wednesday at 02:00 GMT as investors look for signs of economic expansion in the world’s second biggest economy after an extended lockdown period. The data could embrace hopes for a recovery, though investors may need to be less ambitious as uncertainties internally and externally remain intact.

China's reopening adds support to markets

China reopened to the world after two years of zero covid policy, spurring hopes for a global economic revival at the end of 2022, with copper and iron ore futures pivoting higher. Global stock markets cheered on the news too in hopes demand from China could ramp up exports despite tighter financial conditions.

Trade data disappoint

The latest Chinese trade figures however, were a disappointment. Exports shrank by 6.8% y/y in the first two months of the year, while imports tumbled at a faster pace of 10.2%, flagging a continuous slowing demand instead. Overall, trade balance remained negative, even though exchanges with Russia soared at a record pace, with the antipodean currencies, which are sensitive to China’s economic conditions, struggling to gain impetus.

Economic activity increases internally

Domestic economic conditions have been more encouraging. Business PMI figures have been strengthening in the expansion area since the start of the year, with the composite SSE index extending October’s uptrend by an additional 4.0% year-to-date. Interestingly, stock and bond markets were barely affected by the sudden US banking turmoil, with the 10-year government yield remaining flat slightly below June’s peak of 2.96%.

Strikingly, inflation is not forbidding a stimulative fiscal policy like in western economies. The consumer price index rose at the slowest pace of 1.0% y/y in a year in February, whilst the producer price index declined by 1.4% y/y, extending disinflation for the fifth month. That might be an outcome of the persisting covid fears, but despite that, the sharp increase in new loans issued to consumers and businesses over the past two months is rather suggesting that consumption has started to heat up, especially after the central bank’s pledge to keep monetary policy accommodative and the government’s support package to the troubling housing market.

Forecasts

On Wednesday, retail sales, industrial production and fixed investment research data are expected to add to the optimism. Retail sales are forecast to bounce by 3.5% y/y during the combined January-February period after three consecutive months of declines. Likewise, industrial production and fixed investment are projected to rebound, marking a stronger but still relatively weak growth of 2.6% and 4.4% respectively compared to pre-pandemic years.

China's outlook still uncertain

The stats could justify hopes for a reviving Chinese economy in the short term as Beijing is set to start processing visa applications for foreign tourists this week. But the government’s fresh decade-low GDP growth target of 5.0% suggests China will not cut spending too quickly as risks keep lingering in the background.  According to Bloomberg, provinces and municipalities are increasingly reliant on transfer payments from Beijing as the slash in taxes during the pandemic has exhausted fiscal resources. Moreover, with the important property market having yet to recover from a record plunge, regulatory crackdowns in the tech industry persisting, and tensions with the US over Taiwan and Russia not easing soon, investors should not expect a growth miracle soon.

The new AUKUS partnership plan between Australia, the UK and the US, which aims to counter China’s activities in the Pacific Ocean may further worsen the already tense relations between the countries.

AUD/USD

Hence, unless China’s data beat analysts’ expectations by a large margin, they could softly boost antipodean currencies.

Looking at aussie/dollar, the sell-off in the greenback helped the pair to exit the bearish channel in place from February. Still, the pickup was not strong enough to drive the price above the key resistance of 0.6740-0.6765. If the bulls clear that barrier, the recovery could stretch towards 0.6860.

On the downside, a step below 0.6630 would shift all the attention to 0.6580. A break lower could strengthen the downtrend to 0.6520, while a steeper decline could stabilize around 0.6460.