It looks like China’s Economic Slowdown Has Halted

China’s 25-member Politburo, the ruling body of the country headed by President Xi Jinping, reviewed China’s first quarter growth at their meeting on Friday and concluded that the market’s confidence in the Chinese economy had returned, and that economic performance was “better than expected”.
This is welcome news given the risks that the Chinese economy has faced during their trade showdown with the US, which now seems very close to reaching a positive conclusion. China’s economic stabilization was achieved using Beijing’s favourite playbook of massive capital spending fueled by easy credit. Q1 GDP came in at an annualized 6.4%, and other indicators, from industrial output to the purchasing manager index, also point to a broad-based recovery in the world’s second largest economy. This is very positive news, which has calmed concerns over an impending global slowdown.
Will the change in focus be enough?

Now that their former stimulus efforts have worked as planned, China will shift its focus to “reform and opening up” as well as “restructuring” the economy, which was one of the key demands from the US during trade negotiations. Some in the market are disappointed that China will not be applying enough stimulus going forward to keep GDP growth in the targeted 6.0-6.5% range. If stimulus is no longer the focus, and the planned structural reforms take too long to implement, there is a risk that Chinese growth slows again. The market expressed this concern this morning by selling risky assets. The Australian dollar, which is a proxy for Chinese growth, slipped circa 1% since the start of the Politburo meeting.

What does this mean for the US?
A Chinese slowdown was one of the major concerns over US economic performance for 2019 expressed by economists polled at the beginning of the year by Bloomberg. Interestingly, in their most recent survey of economists taken last week, instead of expressing concerns over US growth, 49% of economists now think that the Fed has policy ‘about right’, 37% think they are need to tighten further, and 14% think the Fed should ease rates. In all, this mix of responses doesn’t seem to point to concerns over a US recession to the degree that was prevalent earlier in the year. This easing of US recession concerns is echoed by Blackrock’s CEO Larry Fink, who said over the weekend that he sees no signs of a global recession in the next twelve months. With $5.6 trillion in AUM, Blackrock keeps a very close eye on the global growth prospects.

What about FX?
Given the positive global economic outlook, one would expect risk assets such as equities and EM to be in favour. However, it’s far more difficult to predict what will happen to developed market currencies. The argument of late has been that in a risk-off scenario, one would expect a flight to safety, which would benefit traditional safe haven currencies like the USD, CHF, and JPY. If we’re in a risk-on scenario, will that mean that GBP, CAD, EUR, AUD, etc will rally? Very tough to say as each has their own idiosyncratic issues to deal with. What will likely happen is that vols will remain low and therefore protection and optionality will be relatively inexpensive. Not a bad time to protect yourself from a liquidity event should we see a turn lower in the USD on the back of diminished risks to global growth.

Author: John Glover