China's economic outlook brighter with trade deal in sight

The country's manufacturing sector continued to expand output in December, according to government data

China's economy is bouncing back with strengthening manufacturing sector. EPA

China’s manufacturing sector continued to expand output in December, adding to evidence that the world’s second-largest economy is stabilising as the signing of a phase one trade deal with the US nears.

The manufacturing purchasing managers’ index remained at 50.2, according to data released by the National Bureau of Statistics on Tuesday. The outlook for export-oriented firms brightened, with a sub-index of new orders for export rising above the 50 mark for the first time since May 2018, production recovered for a second month and output prices narrowed decline.

On the downside, the non-manufacturing gauge fell to 53.5 from 54.4, and an index of small manufacturing firms dropped after a strong rebound from the previous month.

China’s economy appears to be reaching the bottom of a cyclical slowdown as 2019 draws to a close, aided by the prospect of an agreement that will prevent further tariff increases on goods shipped to the US and de-escalate a trade war that’s battered the global economy. Domestic stimulus efforts, ranging from tariff cuts to support for infrastructure spending, are also buoying sentiment.

The White House’s leading China hawk, trade adviser Peter Navarro, said Monday that the preliminary trade deal reached earlier this month with Beijing is completed.

"That's a done deal, put that one in the bag," Mr Navarro said on Fox News.

He declined to confirm a report by the South China Morning Post that Chinese emissaries led by Vice Premier Liu He will travel to Washington this weekend to sign the accord.

The upcoming Lunar New Year has boosted the domestic market while the Christmas season bolstered overseas demand, according to a statement by the China Logistics Information Centre, which helps compile the data. News about a phase-one trade deal has stabilised market confidence and expectations, which benefits both imports and exports, it said.

The reading “reflects the continued recovery of manufacturing confidence due in part to the easing of US-China trade tensions”, Yingke Zhou, a China economist at Barclays Capital Asia in Hong Kong wrote in a note. “We remain constructive on a near-term recovery,” and the central bank will likely announce a cut in banks’ reserve ratios as early as this week, he said.

The economy still faces strong growth headwinds into 2020 as the private sector struggles to access cheap funding and the large amount of outstanding debt limits the scope of government spending.

"Our concern for longer-term economic slowdown remains. In the domestic market, private sectors are still facing difficulties in funding and consumption may remain sluggish," David Qu, Bloomberg China economist said.

"For external sectors, heavy US tariffs remain in place, and the trade talks with the US will be crucial for economic outlook. We maintain our view that the central bank has more easing to do, though probably less so than it appeared to be a month ago."

Economists had forecast a slight decline in the PMI reading after a strong rise in November.

Signs have strengthened since November that the deceleration in the economy was reaching an end for now.

Infrastructure investment will likely recover as local governments start selling debt from January 2, earlier than previous years. Consumption will receive support in 2020 on efforts to eliminate poverty, and auto sales have seen narrowing declines in recent months. Exports could get a lift on the rollback of US tariffs on Chinese goods and a low base.

Production in China also gained steam in recent months, and analysts expect some sectors to start a re-stocking cycle of inventory that could drive up demand and prices. Overall borrowing costs by businesses will likely fall when all the loans are priced with the loan prime rate, the new pricing reference, by August.

However, the downside factors point to the challenges ahead for policy makers: the rebound in infrastructure investment could be challenging as local government fiscal power remains tight and off-balance-sheet borrowing continues to be restricted.

Robust credit growth in the country may have been overstated and small banks and local government financing vehicles face relatively high financial risks.

However, on balance, economists are upgrading their forecasts, with the consensus currently seeing an expansion of 5.9 per cent in 2020, in line with the gradual slowdown desired by policymakers.

“Considering that the global manufacturing cycle may continue to be on the mend, property-related policies may loosen on the margin, and credit expansion may be propped up by a pro-growth PBOC [People's Bank of China], it is likely for the recovery in cyclical momentum to carry into early 2020,” economists including Yuan Yue at China International Capital wrote in a note.