1. Newsroom
  2. Watch for China’s bounce
Menu
Insight 17.07.2019

Watch for China’s bounce

Watch for China’s bounce

China’s reported gross domestic product (GDP) showed a modest deceleration to 6.2% year-on-year (yoy) in the second quarter of 2019 (2Q/19) from 6.4% in the previous two quarters.


This is in line with our and the market’s expectations for a softer quarter after a firm start of the year. We maintain our full-year 2019 GDP forecast at 6.2%.

Surprise bounce

The real story in the latest data releases is the surprise significant bounce in most domestic activities in June. Reported numbers from industrial production to retail sales and fixed asset investment were buoyed by increased total credit expansion last month.

Our credit impulse indicator has revived to a meaningful level. We think that the results of a more effective stimulus are starting to show – this should have positive earnings implication ahead.

Against the mild contraction in China’s June export growth (-1.3% yoy), the picture is clear. Beijing’s effort to counteract the trade war’s impact by buttressing domestic demand is showing renewed effect after some slippages in early 2Q.

In particular, the recent relapse of infrastructure growth (down to a mere 1.5% yoy in May) was quite disappointing given all the efforts to boost the sector’s financing support by stepped-up special bond issues. However, June saw growth revived to a more solid 5.4% growth, aided partly by low-base effect.

Real estate investment and new housing growth continued to stay robust at around 10% yoy. This is despite local reports of the government restricting some shaky trust loan lending for mortgage purposes.

The weakest link remains in manufacturing investment – understandably, the sector is still directly affected by the trade war.

Reinforced optimism

The credit numbers have reinforced our near-term optimism:

  • Our China’s credit impulse measurement has rebounded markedly to double-digit expansion in June (up 10.5% yoy) for the first time since October 2018. This acceleration has reinforced our earlier argument that China needs a policy stimulus similar to the scale in 2015-16 and it seems to be moving to this direction.
  • Given the strong lead-lag relationship between credit impulse and domestic demand growth in China, our analysis suggests a noticeable revival of the latter in 2H/19 as the cumulative liquidity effect filters through.
  • Total social financing (TSF) flow accelerated noticeably reaching some RMB2.26trn ($328bn) in June. This was driven largely by short-term loans (to support private sector and SMEs), local government bond issues (to support infrastructure projects), and mortgages (to support the backbone of China’s domestic economy amid the trade war).

Good omens

Overall, the strong rebound in economic activities will bode well for growth and earnings expectation in 2H/19.

This should support China’s equity market valuation which has rebounded to marginally over mean level currently for MSCI China. The index is at about 12.2x forward price-to-earnings (P/E) from recent low of 11.0x in May with about 14-15% 2019 earnings per share (EPS) growth forecast.

We think investors will continue to focus on China’s policy stimulus theme. Domestic and new economy plays will be the beneficiary of the lingering trade war saga.

Our expertise

Read the full document with charts:


CHAN-Anthony_150x150.jpg

Anthony Chan
Chief Asia Investment Strategist

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Most read

Insight 01.10.2020

COVID-19: UBP keeps you up to date

Since this coronavirus appeared, UBP has provided its clients with guidance and support as we all tackle this unprecedented global health crisis. We give you regular updates on everything from our own safety protocols and the recommendations issued by the authorities to our experts’ latest analysis on the effects of the pandemic on the world economy and financial markets.

Insight 30.06.2020

UBP Investment Outlook 2020 Reset

The Global Economy at the Crossroads

Insight 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.


Further reading

Insight 21.11.2020

UBP Investment Outlook 2021

A Brave New World

Insight 09.11.2020

Will Chinese domestic consumers become the next global growth engine ?

China revealed the key themes of its upcoming 14th Five-Year Plan (14-FYP) and long-range objectives through the year 2035. The Fifth Plenum took place amid signs of stronger economic recovery, with better performance spilling over onto the domestic sector.
Insight 02.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.