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China economy

Key economic health check set to show how China would cope with US trade war

Data will show how economy is faring as tariffs deadline looms

PUBLISHED : Friday, 29 June, 2018, 11:07am
UPDATED : Friday, 29 June, 2018, 11:10pm

A key economic release this Saturday will give one of the earliest signs of how China’s economy is faring as a wave of higher tariffs on trade with the US approaches.

As the first official reading for June, the purchasing managers indexes will probably show the economy easing back further, according to economists surveyed by Bloomberg.

Factories will be one of the initial places to see any impact from an impending trade war, as the effect of expected higher duties travels back along Asian supply chains. Indicators of services and construction will also show how domestic demand is holding up.

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The earliest indicators gathered by Bloomberg showed the economic slowdown deepened this month amid tighter credit and trade tensions, headwinds that helped send the nation’s main stock index into a bear market this week. The People’s Bank of China is increasingly signalling that it will support growth, though as yet it has not eased policy outright.

The central bank will keep a close eye on domestic and global economic developments and step up forward-looking policy fine-tuning, according to a statement released on Thursday, one day after a meeting of the advisory monetary-policy committee led by Governor Yi Gang. It was the first gathering of the PBOC’s advisory panel since Yi took office in March.

Unless China and the US reach a breakthrough agreement, tariffs on US$34 billion of respective imports will take effect on July 6. For the PMI releases, an important point is that they can be more indicative of what will happen in the short-term future, rather than a definitive gauge of what is happening now.

Three subsidiary gauges in the manufacturing PMI release will show demand for manufactured goods. The Caixin China Manufacturing PMI, a similar private gauge whose sample is comprised of smaller and export-oriented firms, will be released on July 2.

The central bank tried to support lending to smaller companies when it announced a cut in required reserve ratios on June 24, but even with that support, smaller businesses – usually not favoured by the banks as clients – may still face a squeeze as credit expansion slows across the board.

“Whenever regulation and liquidity conditions tighten, small companies are the ones who are hurt; and whenever the regulation and liquidity loosen, state companies and speculators benefit,” Zhang Ming wrote in a note this week. Zhang is the director of international investment research at the Chinese Academy of Social Sciences, a state-backed think tank in Beijing.

The difficulties smaller companies are facing is clear from the PMI data.

A slowdown in investment has intensified this year, as policymakers act to reduce leverage at state-owned companies and local governments, including by scrapping some regional infrastructure construction projects.

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Meanwhile, the property market is holding up. A sub-gauge of construction in the non-manufacturing PMI will indicate the health of these two sources of demand and indirectly, the appetite for steel, glass and cement.

Two gauges of price expectations in the manufacturing PMI can show whether factory inflation has held up in June. That is important, as higher output prices would bolster factory profitability and increase their ability to pay off debts. China’s factory inflation rebounded more than expected in May on commodity price gains.

“Credit tightening is taking a toll on the economy, but that doesn’t mean China lacks the capability to cope with a trade war,” said Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong. “If the two countries can’t avert the trade war eventually, China will slow down its domestic deleveraging drive.”