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SA's economy: what could go right?

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China's response to slowing economy and trade war in charts

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China’s economy was slowing even before the impact of the US trade war threatened Chinese exports. As tariffs bite, downward pressure on the economy will increase.

In response to the slowdown and the headwind from tariffs, China has launched monetary and fiscal stimulus measures while allowing the renminbi to weaken. Below are 10 charts illustrating vulnerabilities in China’s economy and how Beijing is responding. 

Problem: investment slowdown

Investment in fixed assets such as housing, factories and infrastructure remains the largest component of China’s economy, despite some progress in rebalancing towards consumption. 

Following an infrastructure boom in 2016-17 that has helped stabilise investment, spending on roads, railways and sewer systems has slowed amid a crackdown on borrowing by local governments. 

Response: infrastructure stimulus

In July, China’s cabinet instructed local authorities to accelerate infrastructure spending, funded through the sale of a new type of infrastructure bond. Since then, localities have flooded the market with such bonds, though issuance slowed sharply in October. 

Problem: weak lending

A fierce campaign to contain financial risk from excessive debt led to a sharp slowdown in credit flow, especially from shadow banking. Tight financing conditions have contributed to the economic slowdown. 

Private companies have suffered disproportionately from the financing squeeze, with better funded state-owned enterprises nationalising at least 10 struggling private groups this year. 

Response: monetary stimulus

The People’s Bank of China has cut banks’ required reserve ratio three times this year and conducted cash injections through open-market operations, leading to lower interest rates. 

To aid private groups specifically, the PBoC has increased targeted lending to banks that lend to small businesses, most of which are private. The central bank has also offered new funding to state-owned institutions that provide credit guarantees to support bond issuance by private companies. But lending remained weak in October, prompting analysts to forecast additional monetary easing.

Problem: flagging consumption

Consumption is now the main driver of Chinese economic growth, contributing 78 per cent of gross domestic product growth through the first nine months of this year. 

But a slowing housing market, rising household debt and slower wage growth is dragging on consumption

Monthly retail sales growth hit an all-time low in May and remained near that level in October. Auto sales have also slowed sharply

Response: tax cuts

China’s legislature has approved cuts to personal income taxes designed to spur consumption. The cuts, which take effect in January, will be worth as much 0.5 per cent of GDP next year and could boost retail sales by about 1 per cent, according to Deutsche Bank. 

Local media have also reported the state planning agency is considering cuts to the vehicles purchase tax.

Problem: tariffs set to weigh on exports

Chinese exports were unexpectedly strong in October, despite the US imposition of tariffs on $250bn of Chinese goods. 

But front-loading of shipments — in anticipation of the main tariff rate increasing from 10 per cent to 25 per cent in January — contributed to the strong October data. Most analysts believe that exports will eventually slow as a result of the trade war

Response: moderate renminbi depreciation

China has not actively intervened to weaken the renminbi. In fact, the PBoC spent about $32bn in October to boost the currency, its strongest monthly intervention since January 2017. 

But the central bank’s recent interventions have been far weaker than during the last bout of depreciation in 2014-16, when the PBoC spent nearly $1tn to curb renminbi weakness, including an average of $70bn per month during a six-month period in late 2015. 

Analysts say this light-touch approach reflects Beijing’s comfort with moderate renminbi depreciation, which can partially counteract the impact of tariffs on the dollar-denominated price of Chinese goods. The renminbi has weakened 6.3 per cent against the dollar in 2018 and 2.6 per cent against a trade-weighted currency basket

Problem: falling stock market

China’s CSI 300 index, which tracks blue-chips traded in Shanghai and Shenzhen, hit a two-and-a-half year low in mid-October. It has since recovered slightly but remains down 20.5 per cent in 2018. 

Response: prevent forced share sales

Beyond concerns about a trade war and a slowing economy, investors are worried about an overhang of Rmb4.3tn ($618bn) of shares that have been pledged as collateral for loans as of mid-October. The falling market threatens to spark a wave of forced share sales as stock prices approach the levels at which creditors must sell to recover the value of their loans. 

In response, a group 11 of state-owned brokerages has committed to spend Rmb21bn to support borrowers and prevent forced liquidation of collateral. Participation by state banks, insurers and other institutions could eventually raise the size of this rescue fund to Rmb100bn. 

China’s banking regulator has also privately urged banks and brokerages not to liquidate pledged shares, local media reported. 

Twitter: @gabewildau

Additional reporting by Yizhen Jia

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What the Brexit deal means for business, markets and the economy

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Prime Minister Theresa May said Wednesday that her cabinet supported the deal, but she must still push it through a divided parliament. If she does, executives and investors will at long last have a road map.
“This is a decisive step which enables us to move on and finalize the deal in the days ahead,” May told reporters following a marathon cabinet meeting. “It is a decision that is firmly in the national interest.”
Here’s what the deal would mean for business, markets and the economy.
Companies in Britain and the European Union have spent months preparing for a chaotic Brexit. Their biggest fear is a scenario where the United Kingdom crashes out of the European Union, leading to new trade barriers.
That risk hasn’t been completely eliminated and companies remain cautious. Still, business groups including the British Retail Consortium welcomed news of a potential deal.
“It is vital that we avoid the cliff edge of no deal in March 2019 as this could immediately lead to consumers facing higher prices and reduced availability of many everyday products,” said Helen Dickinson, the industry group’s chief executive.
Key manufacturing firms also cheered the emergence of a deal.
“My gut feeling is we need to get behind it and we need to make this deal work. What we need is certainty,” Juergen Maier, UK CEO of German engineering giant Siemens (SIEGY), told BBC Radio.
The deal includes a transition period during which most trading rules for companies in Britain will remain the same. A joint declaration published Wednesday said that agreement had been reached on a close relationship on trade in financial services, and broad cooperation on transportation and energy.
But businesses have also been warned to prepare for a scenario where the deal falls through.
“We still urge business to continue preparing for both a deal and no deal scenario until the deal is ratified,” said Andrew Gray, head of Brexit at PwC.
One more problem: The deal only covers the divorce terms, and doesn’t give businesses much clarity about a future trading relationship between the United Kingdom and its biggest trading partner following the transition.
The joint declaration said that negotiations had been “particularly challenging” on how future trade in goods would be conducted.
Judgment day for Brexit as Theresa May awaits Cabinet verdict
The pound has been volatile since Brits voted to leave the European Union in June 2016, and it’s still trading almost 14% lower than on the day of the referendum.
Analysts said it would strengthen following a deal.
“If the deal as described in the press were to pass into law, both [the pound] and [the euro] would benefit,” Kit Juckes, a strategist at Societe Generale, wrote in a note to clients.
Is Brexit done now? Of course it isn'tIs Brexit done now? Of course it isn't
Kallum Pickering, a senior economist at Berenberg bank, said the pound would likely jump higher in two stages, along with government bond yields and shares in companies that do business in Britain.
He expects the first increase to happen after the UK parliament approves the divorce deal, which could happen in December, and the second to occur over the following year as investors update their outlook for the United Kingdom.
If a deal can’t be struck and Britain crashes out of the bloc, S&P estimates the pound will slump 15% against the dollar.
Economists say a Brexit deal would boost the beleaguered UK economy.
“While the long-term risks to UK potential growth from Brexit loom large, the prospect of a deal presents considerable upside potential for the UK economy over the medium-term,” Pickering said.
Berenberg estimates that a deal would lift economic growth to 2% in 2019, from 1.3% this year.
The UK economy slowed sharply following the Brexit vote, but it has avoided slumping into recession. Investment also slumped dramatically.
A chaotic Brexit, without a deal, could sink the economy into a prolonged recession, S&P warned last month.

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Global slowdown: 3 of the top 4 economies are suffering

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The economies of Germany and Japan shrank in the third quarter, according to data published Wednesday, providing a sharp contrast to another quarter of strong US growth. In China, there are signs of a deepening economic malaise.
The reasons for the weak performance are varied, and economists believe that both Germany and Japan will dodge recessions by returning to growth soon. But the data underscore the major challenges faced by many of the world’s largest economies.
China is buying fewer cars. GM and VW are feeling the pain
Germany’s economy shrank for the first time since 2015 in the third quarter. It was hit by new auto emissions testing procedures that slowed car sales and a decline in exports, partly due to the US-China trade war.
The car certification bottleneck is expected to ease, but economists say export growth could weaken further because of reduced demand from major trading partners such as Turkey, Russia and China.
Japan is much more accustomed to economic stagnation, and even recessions, but the outlook there is brighter. Its lackluster third quarter was caused by natural disasters, and economists expect consumer spending to spike this quarter ahead of a planned sales tax hike next October.
Japan's economy has a $5 trillion problemJapan's economy has a $5 trillion problem
In China, the world’s second largest economy, new data Wednesday revealed weaker consumption growth, subdued confidence and disappointing credit growth. Economists expect the government to ramp up stimulus measures to mitigate the effects of a trade war with the United States.
“We believe the worse is yet to come, with growth slowing faster into spring 2019,” Ting Lu, chief China economist at investment bank Nomura, wrote in a research note.
And despite the prospect of a rebound in Germany and Japan before the end of this year, the global economy is also heading for a weaker 2019.
Forget the trade war, China's economy has other big problemsForget the trade war, China's economy has other big problems
The International Monetary Fund expects global growth to slow to 2.5% in 2019 from 2.9% this year.
Risks clouding the global outlook include the trade war and the impact of US interest rate hikes on emerging markets. Italy, which is locked in a standoff with the European Union over government spending, could spark another crisis in Europe.
A container delivery truck drives past stacked piles of shipping containers at the Port of Long Beach.A container delivery truck drives past stacked piles of shipping containers at the Port of Long Beach.

‘Significant slowdown’ in the cards

“We’re not thinking it will be anything like [the financial crisis], but there might be a significant slowdown next year. It’s very possible,” said Andrew Kenningham, chief global economist at Capital Economics. “We think the IMF is too optimistic.”
Some of the risk is already reflected in markets. On Tuesday, fears over weaker global demand helped push US oil prices down 7%, and major stocks indexes are 5% to 7% off their peaks.
One big question is which countries might serve as growth engines in 2019.
Oil nosedives 7%, its biggest plunge in three yearsOil nosedives 7%, its biggest plunge in three years
India’s economic growth has accelerated this year, hitting 8.2% in the most recent quarter. But as one of the world’s biggest energy importers, it has felt the pain of higher oil prices this year. The rupee is one of the world’s worst performing currencies in 2018, and that has further stoked inflation.
The United States could also move into the slow lane next year as the effects of tax cuts fade.
“We think the United States will slow quite significantly,” said Kenningham. “The fiscal stimulus is temporary and the Fed is raising interest rates.”

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