Chinese faces ‘trade recession’ as US tariff war bites
The US-China trade war is increasing global economic risks and calls for further stimulus in China.
China’s trade data yesterday showed unexpected falls in imports and exports, the first fall in iron ore imports in eight years and the biggest fall in total imports from Australia since mid-2016.
While its trade surplus surged to an almost two-year high of $US57 billion ($79bn) in December, China’s imports fell 7.6 per cent and exports fell 4.4 per cent year on year. That undershot expected gains of 4.5 per cent and 2.2 per cent, reinforcing concern that the trade war is exacerbating a slowdown in the world’s No 2 economy and Australia’s biggest trading partner.
Financial markets reacted cau- tiously, with S&P 500 futures down 0.8 per cent, China’s Shanghai Composite down 0.6 per cent Brent crude oil down 1.1 per cent, while copper futures were down 1.2 per cent. The Australian dollar fell 0.5 per cent to US71.8c.
However, both the Australian sharemarket and iron ore futures prices were little changed.
Although it might help Beijing avoid a current account deficit, the higher trade surplus did not imply a better outlook, ANZ Greater China economist Raymond Yeung said. Moreover, China now faced a “trade recession”, with declining new export orders in the second half of 2018 signalling a downtrend in exports over the first half of 2019.
“The falling sales orders reported in earlier months are beginning to show up in China’s monthly exports data,” Mr Yeung said. “The anecdotal reports of Chinese exporters front-loading their cargoes ahead of tariff hikes in 2019 may explain the strong exports seen in late 2018. However, in the months ahead, we are likely to see some payback of the earlier strength in exports.”
Mr Yeung said the share price of Apple — which tumbled after a profit warning from the tech giant at the start of the year — was the best gauge of China’s export outlook, as the market gave the most accurate assessment of the global electronics industry.
“Even though there are signs that the US and China may be able to reach a trade deal, the reality is that the US economy is slowing, hurting the demand for China’s products,” he said.
But despite calls for greater fiscal and monetary stimulus in China, Beijing has no intention to devalue the yuan as financial stability remains top priority, according to Mr Yeung. “Since 2019 is the 70th anniversary of the People’s Republic of China, we believe the authorities will mitigate every single financial risk to avoid a similar scenario like that of the 2015 yuan devaluation.”
Similarly, Citi’s chief China economist Li-Gang Liu predicted China’s trade growth would slow significantly amid “huge uncertainty” about the trade war, as Beijing and Washington remained “far apart”, despite expectations that the Chinese Vice-Premier would visit the US later this month for trade talks.
Despite some optimism after the Trump-Xi summit in Argentina last month, Mr Liu saw “significant uncertainty” about the chance of a trade deal after a truce on planned tariff increases ended on March 1.
Indeed, he expected “major disagreements” on China’s governance of stated-owned enterprises and subsidy issues, data storage and protection, internet services, certain areas of its “Made in China 2025” policy, and verification mechanisms for any agreements.
“Even with the rising probability for both sides to reach an
The US’s biggest public companies are warning that their earnings may not be as strong as they hoped this year, intensifying pressure on a bull market that has struggled to regain its footing.
Firms in the S&P 500 were projected back in September to report fourth-quarter earnings growth of 17 per cent from the year earlier.
But dimmer expectations for global growth and disappointing holiday sales have forced many companies to slash their forecasts, pushing the estimated earningsgrowth rate for the quarter closer to 11 per cent, according to FactSet.
The drop-off in estimates — the steepest since 2017 — is the latest sign that US corporations, from retailers and airlines to phone makers, are losing momentum after several quarters of standout growth.
Stocks slid in early January after Apple cut its quarterly revenue forecast for the first time in more than 15 years, citing an unexpected slump in iPhone sales in China. Macy’s shares suffered their worst one-day sell-off ever on Thursday after the retailer lowered its guidance for the year. And airline shares fell after Delta Air Lines cut its fourth-quarter forecast, citing a weaker-than-expected holiday season.
The string of downbeat forecasts puts the stockmarket in a precarious position heading into a week when banks including Citigroup, JPMorgan Chase, Wells Fargo and Bank of America are scheduled to report quarterly results. The S&P 500 is up 3.6 per cent for the year but still 11 per cent below its record after a steep selloff in the final months of 2018.
For many investors, the coming earnings season will be a test not just of how profitable companies were in the fourth quarter but also of executives’ optimism about the future. The results will also indicate how well US companies are holding up as economies across emerging markets and the eurozone show signs of faltering.
“These days, people are interpreting everything as the glass being half empty,” said Matthew Forester, chief investment officer of BNY Mellon’s Lockwood Advisors. The firm has generally been focusing on shifting money into higher-quality credit, he said, as well as encouraging advisers to increase allocations to so-called defensive sectors, areas of the stockmarket that tend to hold up during spurts of volatility. “That’s part of the challenge as we look forward.”
Over the past year, corporate earnings haven’t been the balm that many had hoped for the markets. S&P 500 firms boosted their profits in the third quarter of 2018 at the fastest rate yet that year. Stocks and bonds slumped anyway, with the S&P 500 ending the year with its worst annual return since 2008.
Some investors have ascribed the fading power of earnings to unease over the fact that profit growth appears to have peaked for the remainder of the bull market. From the fourth quarter onward, investors are largely expecting a deceleration. Even though the US economy is “still running at a decent clip”, the volatility hitting markets shows many investors were fixated on the “sharp deterioration in growth expectations”, Mr Forester said.
Few believe earnings are about to contract. Analysts are projecting S&P 500 companies will post earnings growth in the low singledigit range in the first three quarters of 2019 before climbing to 12 per cent in the fourth quarter, according to FactSet.
That could be enough to entice buyers back into the market, especially with stock valuations looking relatively low. The S&P 500 trades at about 15.1 times its projected next 12 months’ of earnings, below the five-year average of 16.4 and above the 10-year average of 14.6, according to FactSet.
Stocks slid in early January after Apple cut its quarterly revenue forecast for the first time in more than 15 years