Signs of Steady Growth in China Though RMB Slips and Trade War Escalates

RMB
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The People’s Bank of China slashed the reserve ratio requirement for the fourth time this year, as the economy slows amid escalation of the trade war with the US.

The RRR was cut for most banks by one percentage point, effective Oct 15.

The move will be used to pay down RMB 450 billion (US$65.6 billion) of medium-term lending facilities, PBOC said, adding that it could free up another RMB750 billion in funds.

The move is not expected to put depreciatory pressure on the currency, according to the central bank. “We would continue to maintain a prudent and neutral monetary policy,” PBOC said in a statement.

While China followed by setting RMB at 6.8957 per dollar CNY=CNFX, the lowest since May last year, it is still short of the psychological 6.9000 level.

The fix left the dollar trading at 6.9056 in the spot market CNH=, but off an early top of 6.9157.

Service sector posts fastest growth amid worries over the economy

While worries about continuous RMB fall remain, China’s services sector posts the fastest growth in three months in September on improved demand, higher than the 51.5 points in August, the Caixin/Markit services PMI showed on Monday.

The pick up from last month came mostly from higher new business orders, with the sub-index at 52.4 points, up from 51.7 points in August.

China’s services sector makes up more than half of the country’s GDP. The services sector expanded 7.6% year-on-year in the first six months of the year. The sector includes services such as finance, real estate services, and retailing.

However, the Caixin/Markit services PMI employment sub-index dropped to 49 points for the first time since July 2016, indicating that companies are reducing more headcount than the number of people they hire.

China's trade to remain positive

Despite uncertainties, DHL is sanguine about China's economic growth.

China's trade is predicted to remain positive and solid on an overall level despite a slowing growth in air and ocean trade in the coming quarter, said the logistics player which released data from the DHL Global Trade Barometer on Monday.

The DHL Global Trade Barometer, an early indicator of global trade developments calculated using Artificial Intelligence and Big Data, shows that China's overall index decreased from 63 to 59 compared to June.

In the Global Trade Barometer methodology, an index value above 50 indicates positive growth, while values below 50 indicate contraction, said DHL.

Developed jointly by DHL and Accenture, the DHL Global Trade Barometer provides a quarterly outlook on future trade, taking into consideration the import and export data of seven large economies: China, South Korea, Germany, India, Japan, the UK, and the US.

Together, these countries account for 75 percent of world trade, making their aggregated data an effective bellwether for near-term predictions on global trade, DHL noted.

Most of the China's subdued growth will likely stem from air imports of chemicals & products, capital equipment, machinery parts, consumer fashion goods and temperature or climate controlled goods, said DHL.

Ocean trade is also expected to maintain moderate growth at 56 points due to high exports of personal & household goods and machinery parts, the logistic firm added.

"With the rise of domestic consumption and e-commerce platforms in China, consumer spending is expected to drive the country's GDP growth despite ongoing uncertainty in its global trade relations," said Steve Huang, CEO, DHL Global Forwarding Greater China.

"Domestic consumption contributed almost 80% of GDP growth in the first half of 2018, an increase of more than half the year before. As such, we're beginning to see the effects of China's economic transition towards becoming a digitally-enabled mass-consumer market, even as trade continues for raw materials necessary to their manufacture,” he added

The Barometer's results also suggest that despite intensifying global trade disputes, mainly between China and the US, world trade is expected to grow over the next three months albeit at a slower pace, according to DHL.

The growth outlook looks positive for all Asia Pacific countries with India leading the ranks, along with optimistic outlooks for South Korea, China, and Japan, the firm said.