Richard Jerram, Chief Economist, Bank of Singapore, Member of OCBC Wealth Panel

Soft data, but far from terrible

Latest data from China can be interpreted as a glass being half full or half empty. Data is certainly soft, but it is far from terrible, which could be a sign that policy stimulus is starting to offer some balance.

Purchasing Managers’ Indices (PMIs) give a timely view of the cycle and readings for October show recent softness has continued. Both of the PMIs for manufacturing activity are barely above the break-even line of 50. Details show that export orders are notably weak, which is hardly surprising considering US tariffs on $250bn of Chinese exports.

However, the PMIs are not excessively weak. As the chart shows, China has experienced much worse periods in recent years, which have typically been resolved by policy stimulus to boost growth.

Damage from US tariffs

This is not the end of the story, in terms of damage from US tariffs.

First, there is the prospect of the initial 10% tariff on the recently-announced $200bn of exports being raised to 25% in January.

Then there is the risk of similar tariffs on all the remainder of Chinese exports (about another $270bn). There could also be time-lags involved, as companies need to re-structure their production networks towards other countries, so the pain could intensify into 2019.

Policy support slowly trickling through the real economy

China is certainly an export-superpower, but it is also a huge economy and exports make up only about 20% of GDP (it was one-third as recently as a decade ago). A useful rule-of-thumb is that large economies tend to be less trade-dependent than small ones. Total exports to the US are about 4% of GDP, so it should be possible to stimulate domestic demand to offset the damage.

The hit from US tariffs was telegraphed well in advance, so the policy response is already in motion. Income tax cuts, a boost to infrastructure spending, looser credit availability and a weaker exchange rate are all working to support demand. Recent data suggested that infrastructure spending is already showing some signs of turning around.

There is no guarantee that the current policy stance will be enough to balance the hit to exports – and it does not need to exactly. However, there is an implicit promise of more to come, if necessary, as shown by talk of cutting taxes on automobile purchases. The long-term need to control the credit bubble will (again) take second place to the short-term demand for adequate growth.