Latest Chinese economic and market outlook.
Washington and Beijing have reached a limited agreement to pause the trade war between the world’s two largest economies. The US agreed not to impose fresh tariffs on over $150bn of Chinese consumer goods and to halve levies on $120bn of imports that were introduced in September. In return, China committed to increasing its imports from the US and promised better protection of intellectual property rights. The deal is due to be signed on 15th January, before Trump travels to Beijing to begin “phase two” talks. News of the trade deal and several rate cuts by the Fed have prompted widespread optimism in financial markets. After recently signalling that a recession could be imminent, the US yield curve is now at its most positive in more than a year, suggesting that the Fed has successfully steered the US economy through a global growth scare.
We expect to see further targeted easing in China such as additional RRR cuts. However, such efforts will be a far cry from the huge stimulus packages that we have seen in the past. As a result, the economy should continue its structural slowdown, largely due to base effects and the country’s ongoing shift towards consumption-based growth. While China’s growth rate will trend lower over time, there should be some stabilisation this year if fading trade wars concerns allow business confidence to pick up.
From an equity market perspective, Chinese earnings are forecast to grow by 12% this year, but valuations now seem reasonably full, so we are not anticipating significant multiple expansion from here at the index level.
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