As the US / China trade war rolls on, the effects on both economic sentiment and outlook in China are becoming clearly visible. Indeed, leaders in China are starting to show stronger signs of concern regarding the situation. Over the last few days, the Commerce Ministry alongside the police and other agencies have been asking exporters to inquire about any plans to reduce the labor force or shift supply chains to other countries.
Furthermore, a recent politburo meeting aimed at prioritizing growth and pursuing a more accommodative monetary and fiscal policy has signaled the end to the year-long deleveraging campaign that has been in place. Indeed, the latest statement on monetary policy saw a shift in language from “stable and neutral” to “stable” which indicates a shift towards more aggressive monetary policy in order to focus on boosting growth rather than focusing on deleveraging.
Fiscal Spending To Be Increased
In order to activate the Politburo decision, the cabinet announced plans to ramp up the pace of fiscal spending. The State Council has pledged to quicken the pace of both raising and spending 1.35 trillion Yuan on infrastructure along with pledging a huge tax and administrative fee-reduction plan to slash a minimum of 1.1 trillion Yuan in burdens for companies this year.
Monetary Policy To Remain Accommodative
The PBoC has also been active in providing a more accommodative monetary policy with three reserve requirement ratio cuts this year already which has seen the bank increasing the money supply in China in stark contrast to the Fed’s tightening.
The shift in policy stance in China clearly highlights the growing concern among Chinese leaders about the negative effects of the China / US trade war on the domestic economy. However, many industry experts are concerned that far from bolstering the economy, these new economic measures could actually exacerbate issues in the economy fuelling a surge in debt. China’s economic standing has become increasingly vulnerable over recent years as growth in the country has been underwritten by soaring levels of debt.
Gross Debt at 250% of GDP
Gross debt in China, both public and private combined, is now estimated at around 250% of GDP and the country’s sovereign debt credit rating has been downgraded by both Moody’s and Standard & Poor’s. The big concern now is that these new measures will cause further capital flight from China. Putting further bearish pressure on already devalued assets due to further Yuan weakening in the face of a stronger US Dollar.
Trump Support Down Among Farmers
While China’s leaders are clearly concerned with the effects of the trade war, the US leadership also faces its only challenges. The latest polls show that Trump has lost support from farmers over the trade war with China according to data in the Farm Journal Research Survey.
The farming sector was a key support base for Trump in the 2016 elections with around 70% of votes going in favor of Trump. However, the latest poll shows that only around 50% of farmers would vote for him again. Furthermore, the poll showed that over 40% view Trump unfavorably now and most importantly, 35% view him “less favorably” since the trade war began.
This drop in support comes despite Trump last month announcing a new $12 billion emergency aid plan to aid farmers hurt by retaliatory Chinese tariffs. However, many farmers have said that the aid isn’t enough to make them “whole”.
After surging through the bearish trend line from 2016 highs, USDCNH is now challenging the 6.9179 level resistance which was the May 2017 high. Above here the next major level is the 6.9718 – 6.9853 2016 high.