Chi­nese faces ‘trade re­ces­sion’ as US tar­iff war bites

The Australian - - BUSINESS REVIEW - DAVID ROGERS

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.

AFP

Stocks slid in early Jan­uary after Ap­ple cut its quar­terly rev­enue fore­cast for the first time in more than 15 years

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