Trade War Truce Resolves Growth Uncertainties

Growth data was mixed in April. The value added for industrial firms was up 7% y/y, up 0.2 pps from Q1 and up 0.8 pps from Q4 2017. Fixed asset investment was up 6.1% y/y, down 1.4 pps from Q1, although still higher than in Q3 2017. Specifically, private investment was up 7.5% y/y, down 1.4 pps from Q1, and state investment was up 5.4% y/y, down 1.7 pps from Q1.

Retail sales of social consumption goods climbed 9.4% y/y in April in nominal terms, down 0.4 pps from Q1. The real growth rate rose 7.9% y/y, down 0.2 pps from Q1. In April, exports were up 12.9% y/y, 1.2 pps lower than in Q1, though still high. The seasonally adjusted import growth rate is around 17% y/y. The fact that import growth exceeded export growth will help reduce global imbalance and sustain growth.

CPI was up 1.8% y/y in April, after falling for two consecutive months. We expect CPI this year will be like the trend in 2014, growing at stable rates. The fluctuation interval is between 1% and 2.5% y/y. Producer prices continue their slower growth trend, after growing powerfully for almost two years. The ex-factory price of industrial goods was up 3.4% y/y, and down -0.2% m/m. PPI rose 3.7% y/y, and fell -0.3% m/m.

Monetary policy is still tightening. At the end of April, M1 was up 7.2% y/y, and up just slightly -- by 0.1 pps -- from March. RMB savings deposits from non-financial enterprises were up 6.1% y/y, and up 0.8 pps from March. Both indices were mainly affected by large reductions last month, rather than signaling monetary policy loosening.

After high-level trade talks in Washington, the United States and China announced on May 21st that they would put their tariff increase threats on hold. This is very much consistent with our forecast last month that the trade war would be short-lived. We expect China to import more from the United States, as in the past, mostly in agriculture, high tech and services. This will reduce uncertainties in the global economy, and may boost investor confidence, as signaled the day after the announcement, when the S&P 500 rose 0.8%. Although the agreement would reduce China’s net exports, the impact on GDP would be negligible, as the trade share of GDP is much smaller than it once was. Use of imported high tech as capital goods in industries will certainly boost Chinese firms’ productivity. We view cooperation between China and the United States as a win-win solution for both countries, and for the world.