Macroscope | Why China’s economy faces a bumpy first half of 2019, even if ‘trade peace’ breaks out soon

Sometimes, it seems like financial markets can only focus on one big issue at a time. For much of last year, markets were mainly worried about the broad-based economic slowdown in China, which was a result of policymakers’ efforts to slowly wean the economy off its debt dependence.

This hit emerging Asia equity markets hard, and they fell by more than 20 per cent in the first half of 2018. Then, towards the end of the year, markets turned their attention to worries about slowing growth and rising interest rates in the US economy. This drove a ferocious sell-off in global developed market equities. During this time, emerging and Asian equities actually outperformed most other regions, as worries about the Chinese economy faded somewhat into the background.

Since the turn of the year, some calm has returned to developed equity markets and the focus of worries has once again shifted back to China. Recent economic news from China has been disappointing to markets in terms of both hard data and sentiment. The weakness is likely to continue for the next few months due to tariff shocks and a probable property market downturn.

One key issue is that despite the trade war with the US, China’s exports held up relatively well as exporters front-loaded their shipments to the US to get ahead of expected further increases in tariffs. As inventory levels build up, this front-loading will have to taper and reverse in early 2019, even if a US-China trade deal is reached.

This was probably a big reason behind the recent weak Chinese export data. This does not just concern China itself: its close Asian neighbours, such as South Korea and Taiwan, are also likely to feel the spillover effects and there are already early signs of the Asian export cycle rolling over.

In the face of these headwinds, Chinese policymakers are sure to add more stimulus measures and policy easing. Since the start of this year, they have already substantially eased reserve requirements for Chinese banks, to boost lending, and promised more tax cuts. More monetary, fiscal and property easing measures are very likely to follow in due course.