Retail sales, investment trim China GDP: Watch the RMB

November 5, 2019

HONG KONG - Trade is not the only reason for China's GDP growth to remain sluggish. Retail sales eased again in Q3, dragged down still by the slump in car sales. Fixed asset investment also fell sequentially from June to September, particularly for the industrial sector.

The decline in producer prices has eroded the profitability of the industrial corporates, restricting their ability to invest, according to Natixis, which says that while business sentiment shown by the Caixin manufacturing PMI has recovered slightly, the signal is still weak as it was not accompanied by the official business sentiment indicator on manufacturing.

"Given the weaker economic fundamentals, the PBoC took a more accommodative monetary policy stance, slashing the RRR by 50bps in September.

"But overall financial liquidity has barely improved, with total social financing growing steadily by 10.8% in September. The key 3-month and 1-year money market rates were also flat compared with the last two quarters.

"The PBoC's cautious movement is partially due to its constraints from inflation pressure. The consumer price reached 3.0% in September."

Natixis says the dilemma faced by PBoC, namely the need for stimulus with higher inflationary pressure, has shifted the Government's focus to fiscal policy.

"The earlier announced tax cut lowered revenue growth in the general budget while Government expenditure increased, leading to an even wider fiscal deficit," it says.

"As for financial markets, the equity market remained volatile over the back-and-forth of US-China trade negotiations."

Natixis expects the Chinese economy to further slow towards year-end, and maintain  s its 2019 growth forecast at 6.1%.

"Looking forward, one important issue to watch is the RMB, especially if there is a less-than-expected agreement for the interim (trade) deal.

"China is literally running out of demand policies to push up economic growth, leaving the exchange rate as a choice of last resort." (ATI).