China’s economy would grow by 7.5 per cent this year, were it not for the trade war, ING says
- China’s economy will grow 6.3 per cent year on year in the third and fourth quarters, Dutch investment bank says
- Global investors to ignore dispute and continue investing in China, Nomura says
China’s economy would have grown by 7.5 per cent this year – against a current projection of 6.3 per cent – were it not for its trade war with the United States, Dutch investment bank ING said on Wednesday.
Nomura, the Japanese investment bank, meanwhile, said global investors were likely to ignore the dispute and continue investing in China.
Iris Pang, Greater China economist at ING, said according to a baseline view of continued tensions with little resolution, China’s economy will grow 6.3 per cent year on year in the third and fourth quarters. Although an improvement over second-quarter growth, which at 6.2 per cent was the weakest in at least 27 years, “if there were no trade war, no technology war, everything was dialled back”, China would be growing at 7.5 per cent, she said.
In a worst-case scenario, where “Chinese technology companies can no longer buy anything outside China”, growth will slow to a low of 6 per cent. “It will not fall below 6 per cent, because psychologically that is not good for the Chinese economy, companies, spenders,” Pang said.
If economic growth does fall to 6 per cent, Pang said the People’s Bank of China (PBOC), the country’s central bank, could cut the reserve requirement ratio four more times through to the second half of 2019, up from a current baseline of two.
The cuts would help fund investment in research and development, making up for the loss of imports from the US, Pang said.
In May, the central bank cut the ratio to release about 280 billion yuan (US$41 billion) to small and medium-sized banks, to help companies amid an economic slowdown in the world’s second-largest economy.
The move, implemented in three phases through to July 15, meant the amount of cash banks held as reserves was at its smallest since January 2018, when the PBOC started its latest round of policy easing to support the economy. Since then, it has delivered five cuts and pushed 3.35 trillion yuan in net liquidity, according to Reuters.
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The US-China trade war will only move forward if American demands regarding Chinese telecoms giant Huawei Technologies are taken out of negotiations, and China’s unreliable entities list is released, Pang said.
In June, Beijing announced plans to release a list featuring foreign companies, organisations and individuals that posed a national security risk, or had damaged the interests of Chinese businesses by blocking, or cutting supplies for non-commercial purposes.
A reaction to the US’s blacklisting of Chinese firms such as Huawei, the list is likely to feature FedEx, according to ING.
“There are at least five US companies that could be on the unreliable entities list, and they are all listed in the US, so they will be affected. From there, we will see the Dow [Jones] falling,” Pang said. “Of course, China will also [be affected], but to a lesser extent.”
She said US stocks would decline by 3 per cent the day the list is released, while those in China would fall by 1 per cent.
But capital will continue to flow from the US into Asian markets in the second half this year, as Wall Street has recorded big gains in the first half, according to Jim McCafferty, joint head of Asia-Pacific equity research at Nomura. “Our strongest conviction this year is the rotation of capital from the US into Asian markets,” he said.
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Attractive valuations in China and Japan, strong earnings growth estimates in other Asian countries and the increased weighting of Chinese A shares in the MSCI global indices will naturally drive the change, McCafferty said.
China’s market, on the other hand, had also become increasingly domestically oriented, making it less exposed to global shocks, he said.
“When you look at the A-share names, a lot of them are very domestic. Take the telecom sector. China Mobile, China Telecom, China Unicom – 100 per cent their business activities are within China and its consumers,” McCafferty said.
Nomura estimated the MSCI China Index would be 88 per cent exposed to China’s domestic economy, much higher than the 60 per cent for South Korea and 28 per cent for Taiwan.
