China: Signs of a slowdown in domestic demand - Standard Chartered

Analysts at Standard Chartered suggest that despite a strong start to the year, they have remained wary of China’s economic outlook as the downtrend in the housing market has further legs to run, in their view.

Key Quotes

“Slower credit growth and tighter financial regulations have also pushed up corporate borrowing costs and resulted in a higher number of debt defaults. The disagreement between the US and China on how to reduce the bilateral trade imbalance seems difficult to resolve. Even if a full-scale trade war is avoided, a more regressive long-term relationship between the two largest economies in the world would be disruptive enough to undermine investor confidence and economic activity (Trade tensions – Unintended consequences). As a result, we maintain our view that GDP growth in China will moderate to 6.5% in 2018 from 6.9% in 2017.”

“April data was weaker than expected, with signs of a slowdown in domestic demand. Retail sales growth moderated to 7.9% y/y in April in real terms, from an average 8.1% in Q1-2018 and 9% in 2017.”

“Monetary policy has turned more accommodative in 2018. The change reflects: (1) rising concerns about the ongoing US-China trade dispute; (2) the need to ensure smooth adoption of the newly announced asset management regulations; and (3) intensions to lower corporate borrowing costs.”

“We maintain our forecast that:

  • The People’s Bank of China (PBoC) will raise open-market operation (OMO) rates (e.g., the 7-day reverse repo rate) three more times in 2018, by a total of 15bps (after a 5bps hike in March). An increase is likely to follow a US Fed hike.
  • The PBoC will not raise benchmark savings interest rates. Instead, the central bank has lifted the ceiling on how much banks can raise deposit rates above the benchmark. This should increase the attractiveness of conventional savings products compared to off-balance-sheet investment products. 
  • The required reserve ratio (RRR) will be cut further this year after the PBoC cut the RRR by 1ppt in April. A lower RRR provides banks with cheaper funding than medium-term lending facilities (MLFs). However, a lower RRR may not be enough to lower lending rates, as credit demand is stronger than supply and banks’ funding costs from deposits are on the rise.”

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