IGM Credit, IGM FX and Rates
11 Feb 2020
With the coronavirus outbreak still evolving, the market signal is clear: less growth and more accommodative policy in China.
Further to our forecast given in the previous issue of China Insight that "China will only achieve 4.8-5.3% GDP growth in 2020" because of the disaster, we in the current issue present our view on how the yield curves in China are being impacted.
The broadening of the coronavirus outbreak in China, the lockdown of Hubei province and the extension of LNY holiday have already given a hard hit to the manufacturing sector. Due to that, we inevitably will see a fall in PMI indices in Feb and March. At worst, PMI will continue to be under downward pressure over the rest of H1. In our view, some downturn of the manufacturing sector as a result of the disaster is already priced in 5yr IRS, but a drop by 2 to 3 points in PMI from here should still be able to drive IRS much lower to sub-2016 lows. Given the strong correlation between the NBS Manufacturing PMI and 5yr CNY IRS in the past (chart 1), 5yr IRS at 2.55-2.60% appears to have priced a fall in Feb PMI to around 49.0 from January's 50.0. A further decline in PMI to the 48.0 region in March or during the March-April period, in our view, will bring 5yr IRS down further to 2.35-2.45%.