Group Economics
Macro Weekly China easing on the way
Nick Kounis +31 20 343 5616
21 August 2015 We draw five conclusions from this week’s big macro events. First, China’s industrial sector is still slowing, but help is at hand: monetary conditions are easing and further stimulus looks likely sooner rather than later. Second, China and the Fed continue to cast a shadow over emerging markets and commodities. Third, the Fed looks to be still on track to raise interest rates in September, though China worries and market volatility have made investors sceptical. Fourth, the eurozone economy is on the path of steady recovery, with the composite PMI rising in August. Finally, Greece is set for new elections next month, creating uncertainty.
China slowdown ongoing The China Caixin manufacturing PMI fell to 47.1 in August in
China GDP and monetary conditions index
the flash estimate from 47.8 in July. This took the index to the
Index
lowest level since March 2009, which was during the aftermath
160
of the global financial crisis. The PMI is not as reliable an indicator of growth as in the US or eurozone, while it refers only to manufacturing, while services have been much stronger. Having said that, it does fit into a broader picture painted by recent data signalling that the economy is still losing momentum and there are downside risks to the 7% target.
% yoy
12
140
11 Easier monetary conditions
120 100
8
60
7 6 07
Recent data justifiably raise concerns about a hard landing for China’s economy. Investors question whether the authorities are doing enough and whether they can control the economy
9
80
40
Monetary conditions are easing
10
08
09
10
11
12
13
Monetary Conditions Index (lhs)
14
15
GDP (rhs)
Source: Bloomberg; MCI is made up of a combination of loan growth, real interest rates and the real exchange rate
in any case. We continue to think that the authorities can and will do what it takes to turn the economy round. Stimulus often
Emerging market and commodity woes
works with a lag and there are signs that it will start to gain
Concerns about China, the yuan devaluation and the
traction before long. For instance, there are signs that
possibility of a Fed rate increase, have seriously hurt EM
monetary conditions are finally easing. Bloomberg’s monetary
assets and commodities, while also souring investor risk
conditions index jumped higher in July, to point to a significant
sentiment more widely. At the same time, the slump in these
easing. This reversed the tightening seen since the start of the
markets is often taken as a sign that these economies are
year. Money supply and lending growth are firming.
heading for a slump. For instance, China is the world’s biggest commodity consumer, so if oil prices are falling to (or below)
More to come
the levels seen earlier this year, it is perceived as a sure sign
In addition, the depreciation of the yuan suggests that
of a sharper economic slowdown.
monetary conditions have eased further this month. Finally, we expect the authorities to take further steps in terms of policy
Supply glut is a key factor for commodities
rate cuts and reductions in bank reserve requirements. Our
However, weakness in demand is only a part – and not the
China economist Arjen van Dijkhuizen expects the PBoC to
most important part – of the story. Oil prices – and the prices of
reduce its lending rate by 25bp and its required deposit
some other commodities – have been under pressure because
reserve ratio by 100bp, as well as further yuan depreciation
of over-supply. To the extent that lower prices are driven by
and fiscal stimulus. The first steps could well come sooner
supply, this is actually beneficial to many net commodity
rather than later following the weak China manufacturing PMI
consumers, which will see windfall gains.
survey.