Slower Retail Growth Might Hint China’s Further Slip

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Will China’s economy continue to cool in the next few quarters?

China had a mixed report card for October, according to numbers the country releases today.

The country’s year-on-year retail sales growth dropped to a five-month low at 8.6%, compared to 9.2% last month and below the 9.1% expectation, according to the National Bureau of Statistics.

China’s industrial production growth hit 5.9% in the same period, which was better than the expected 5.7%.

In the midst of a trade war with the US, China is pushing banks to increase lending and cut taxes to help businesses.

While exports remain resilient but that might be because of companies rushing to ship goods to the US before higher tariffs become effective on Jan 1, 2019.

China repeatedly says that its economy no longer relies on export, but now even domestic consumption starts to show sign of slowing down, which has become the biggest worry.

In an effort to boost consumption, China raised the threshold for collecting individual income tax to RMB 5,000 per month from 3,500 RMB in October.

RMB to breach 7.0 against the US dollar?

Though China previously said it won’t depreciate its currency to defend its economy, its RMB has weakened to a 10-year low.

There’s a heated debate about whether the currency will breach the “psychological barrier” of 7.0 against the US dollar.

Although the People’s Bank of China has continued to use the “countercyclical factor” and sell the greenback to keep the RMB below 7.0, it’s also under pressure to stimulate the economy, said French investment bank Natixis.

“It requires an even lower interest rate, which is likely to push the RMB lower,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis. “With the implementation of tighter capital control measures since 2015, it’s very hard to restrict further without hurting real transactions. In a nutshell, the PBoC is now facing a dilemma between growth and exchange rate stability.”

Given the increasingly lax policy stance, Herrero believes that growth will be the priority and exchange rate will be in the backseat.

“The objective of stable currency is to provide an accommodative environment to support the economy. There is no reason to keep a magic number and sacrifice growth,” she noted.

Even if the PBoC wants to keep its exchange rate target, 7.0 is not necessarily a fixed limit, she added.

“Relying too much on a specific point will only make it more difficult for the PBoC to discretionarily safeguard the foreign exchange rate market,” she said.

While the PBoC won’t allow a free of the RMB, the market should look beyond any single number such as “7” especially when China acts opposite to the FED and continues its massive liquidity injection into the market, Natixis said.

“The PBoC is wary of one-way bet on the RMB, and a crowded trade on a specific point could be increasingly risky for investors,” Herrero advised.