China’s “Hard Landing” Still Not Hard Enough For The Haters
This can probably be said every year about China: This is the softest hard landing anyone has ever seen. China’s crash and burn has been forecast by a subsection of global investors that have been betting on the country’s demise since at least 2010. The latest economic data show weakness, but if those numbers can be believed, then China is hanging in there. So much so, in fact, that BlackRock is recommending an overweight on this trade-war-wracked economy.
The January Caixin China PMI Composite is still over 50, but falling. It came in at 50.9 last month versus December’s 52.2. Anything over 50 is good. Caixin’s China Services PMI came in at 53.6 versus estimates of 53.4 and just under December’s 53.9.
The IHS Markit Caixin shows growth in China is now being driven by the consumer services sector. The evidence is more clear with each readout like this. And manufacturing companies continue to weaken because of the trade war and other matters unrelated to it. Chinese companies have been slowing moving to other parts of Asia as costs rise, including the regulatory costs of doing business there.
“The Tale of Two Chinas thesis is alive and well,” says Brendan Ahern, CIO of KraneShares.
The Chinese government has refrained from overstimulating the economy, something Wall Street’s been waiting for. For now, it appears fairly certain that there will be nothing like the stimulus seen back during the 2009 recession. A coordinated stimulus policy has yet to occur. “I find it hard to imagine that the hammer isn’t about to drop on a coordinated policy adjustment,” says Ahern.
China is off to a good start in 2019. Year-to-date, two of the most popular China exchang- traded funds are beating the MSCI Emerging Markets Index, the S&P 500 and the FTSE Europe. BlackRock’s MSCI China (MCHI) fund is up 12.45%. Deutsche X-Trackers China CSI-300, an A-shares equity ETF (ASHR) is up 10.17%. The A-shares have a long way to go. They’ve been beaten up from the trade war and are down over 27% in the last 12 months.
Most Asian markets are closed on Monday and will remain closed for the Chinese New Year holiday this week.
“Markets now see a higher likelihood of a limited U.S.-China trade deal,” says Richard Turnill, chief investment strategist for BlackRock in New York. “This eases a major source of market angst, though any disappointment could sting more.” Turnill’s team recommends Southeast Asian markets but warns that a worse-than-expected Chinese slowdown or new tariffs will upend their overweight call.
Trump is trying to play nice with Xi.
On Thursday, he said Chinese Vice Premier Liu He was “one of the most respected men” in the world following his visit to Washington to discuss trade. Trump insisted that last week’s talks made “tremendous progress,” with the South China Morning Post reporting on Friday that sticking points such as forced technology transfers and Beijing’s agreement to buy 5 million tons of soybeans was a sign of good faith.
China has since cut its tariffs on U.S. soy and is back in the market. It is unknown how long that will last. The 90-day trade truce agreed upon in November ends March 2. That’s when Trump’s main China hawk, U.S. Trade Representative Robert Lighthizer, says that if there is no progress on trade, tariffs will rise from 10% on over $200 billion worth of Chinese imports, to around 25%.
China’s exports to the U.S. ballooned in the second and third quarter before falling off a cliff in December as companies were no longer front-loading exports in order to avoid paying extra duties at the ports.
Trump and Xi might meet the last week of February during the president’s trip to Asia for another summit with North Korea.