After suffering slow growth in 2019, China will find 2020 another tough year for the economy as trade tension uncertainty continues to hurt business confidence while supply-side shock to consumer price restrains room for monetary easing in 1H20. We will unlikely see notable growth stabilisation or a rebound till 2H2020 at the earliest, provided the US-China trade tension does not escalate.
China has been hardest hit by the global economic slowdown since 2Q18 due to trade tensions and its structural deleveraging. 2019 is a year of stress as trade tensions continued to escalate and policymakers further tightened property policy. The GDP growth decelerated from 6.8% in 1Q2018 to 6% in 3Q2019 and will likely reach 6.1% for full-year 2019. Further slowdown in 2020 seems unavoidable, so we won't be surprised if GDP growth sees as low as 5.7% in 2020 on a full-year basis (chart 1).
Sluggish growth in 2020 should be attributed largely to continued slowdown in manufacturing fixed asset investment (FAI) growth as a result of manufacturers' reluctance to invest or expand amid trade uncertainties. We expect FAI growth to decelerate to 5.0 y/y in 2020, down further from 5.3% y/y in 2019 (chart 2). In contrast with the weak manufacturing sector, the property sector will likely see its FAI remain relatively resilient in 2020. In regard to infrastructure FAI, Local governments are reportedly planning to frontload the issuance of special-purpose bonds slated for 2020, which means many infrastructure projects in the pipeline will kick off for construction as soon as the Lunar New Year ends.
The inflation picture in China in recent months has been mixed. Headline CPI inflation has accelerated to 3.8% y/y in October, the highest since February 2012 (chart 3). This has been primarily driven by food prices, particularly pork prices. But core inflation has moderated to 1.5% y/y in recent months, the lowest since May 2016. Also, PPI inflation has dipped into negative territory again since July. We expect headline CPI inflation will rise further or even reach as high as 5.0% in Jan 2020 before it peaks in February. A downward pullback of pork prices after the Lunar New Year should lead to alleviation of CPI inflation pressure. Despite that, headline CPI inflation will still likely see a moderate increase in 2020, averaging 3.0% y/y, up from 2.9% in 2019. In contrast to the headline rate, core CPI inflation could remain quite benign at a sub-2% level, reflecting slowing economic growth and spare capacity. The mild PPI deflation could continue, at -1% y/y in 2020 (vs -0.4% in 2019).
Faced with sluggish growth combined with an unfriendly CPI inflation outlook and ballooning debt burden, Beijing will continue to stick with its patient/cautious approach in supporting the economy. More specifically, we expect the RRR will see a 50bp cut in H1 and another 50bp reduction in H2 2020 if there is no further cut by the end of this year. Meanwhile, the 1-year MLF rate will likely see a gradual 5bp drop per quarter next year. As far as the 1-year LPR rate is concerned, we expect it will fall by 25bp on an accumulative basis to 3.85% in 2020 after a 5bp drop in this year's last fixing on 20 December. In our view, PBOC will continue refraining from easing aggressively as Chinese leaders want to prevent the system from being over-leveraged again.
Last but not least, bond yields will continue to be in a downtrend during the 1H2020. We expect the 10-year CGB yield (chart 4), currently at 3.19%, will reach 2.80% by the end of Q2 next year. Consolidation in a 20bp range could be seen in H2 if economic growth starts to bottom out.
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