Optimistic outlook took a hit today as China's economic growth showed to have slowed to 6.2% y/y in 2Q from 6.4% y/y in 1Q. This was the slowed pace in 27 years (1992). Markets took a bit of comfort in China's decent retail sales, capital spending, and industrial production data. Last week, China's export growth slowed from 1.1% y/y in May to -1.3% in June. Yet the steady pace of slowdown continuing as threats of a trade war and slowing global and domestic demand is taking a toll on China outlook. This fall will increase pressure on the People's Bank of China (PBoC) to further ease and continue with unconventional measures to support the economy. Expectations for the PBoC to wait for signal a new easing bias until the Fed has lowered interest rates are relevant only because the FOMC and forecast 25bp cut, is just around the corner. In reality, the PBoC needs to act and not just with micro tunings such as targeting RRR cuts and medium-term lending facility. Elsewhere, data indicates China has been a net seller of Treasuries for two consecutive months, with total holdings falling to a two year low. Part of this fall is based on revaluation and lower organic demand for USD but there should also consider a political motivation. Clearly, Chinas massive US bond buying operation and low cost funding provides leverage in US-China tariff war.
By Peter Rosenstreich
