With Trade Uncertainty Eased, 6% Growth Target Can Be Achieved

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The United States and China on January 16th struck a "phase one" trade deal, at least easing uncertainty over the future of U.S.-China trade relations. Exports raised 5% y/y in 2019, down 2.8 pps from 2018, while imports raised 1.2% y/y, down 11.6 pps.
GDP raised 6.1% y/y last year, down 0.5 pps from 2018. Industrial output raised 5.7% y/y, down 0.5 pps, while investment raised 5.4% y/y, down 0.5 pps.
Fiscal revenue was up 3.8% y/y in January-November 2019, down 2.7 pps from the same period in 2018. Fiscal expenditure was up 7.7% y/y, up 0.9 pps. So the fiscal deficit is rapidly expanding, constraining government’s future fiscal expansion.
CPI was up 4.5% y/y in December, and up 2.6 pps from December 2018. Producer prices have been growing more slowly in 2019. PPI in December fell -1.3% y/y. PPI has been on its steepest decline since July 2016. The official PMI indicated contraction for a sixth straight month. Both reflect weak domestic demand due to growth slowdown. In response, for the first time since 2016, China on November 20th cut the interest rate on its one-year MLF loans by 5 basis points.
The annual Central Economic Work Conference (CEWC) held by top leaders December 10th-12th emphasized “stabilities.” We believe that “around 6%” is the likeliest 2020 growth target. The conference stated that the direction of housing policy in 2020 would be stable. We expect the stabilization policy to ease concerns of potential risks that real estate poses to the macroeconomy. Our confidence is based on China’s strong fundamentals, and strict real estate purchase restrictions.
On January 14th, the U.S. Treasury department dropped China’s designation as a “currency manipulator.” Onshore RMB instantly jumped by 0.2%, its highest level since July. Non-banks also showed net FX inflows of around $6 billion in December. We expect all of these indicators to improve significantly in 2020. Our faith is built upon China’s still-strong fundamentals, relatively peaceful U.S.-China relations in a U.S. election year, and China’s high capital return.