Chinese Economy Increasingly Reliant on Fiscal Stimulus

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The latest economic data from China suggests that recent fiscal stimulus efforts in the world’s second-largest economy have been successful.

Fixed asset investment rose 6.1% year over year in February. This was a firm increase from the prior 5.9% reading. Similarly, infrastructure investment also rose by 4.3% in February. This was 0.5% higher than the average rate over 2018.

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Infrastructure Spending Strong

Looking at the breakdown of the infrastructure spending, road and transport investment, funded mainly by local government bonds, rose by 13% year over year. This marked a 4.8% increase on the average rate seen over 2018. A quicker pace of growth in this category has helped offset the slower growth seen elsewhere, such as in the manufacturing sector.

Industrial output over the first two months of the year hit a 17-month low of 6.1%. This will likely act as the catalyst for a fresh wave of stimulus in the country. However, we should consider the data on industrial production somewhat unreliable given the three weeks of factory closures during the Chinese New Year. Therefore, traders should wait for next month’s data before drawing too heavily on this reading.

Fiscal Stimulus To Continue

Looking ahead, we are likely to see an even stronger impact from the government’s fiscal stimulus. This should be the main driver of growth in China over the year ahead while the market awaits details on a potential trade agreement between the US and China.

Elsewhere in the data, real estate development increased by 11.6% year over year in February. The result was up from the prior 9.5% reading. Within that category, residential property development displayed gains of 18% year on year, accounting for around 70% of the total real estate development reading. The reading is likely a reflection of some local governments deciding to relax measure around home-buying. This will allow for lower mortgage rates, taxes and reduced down payments.

Disappointingly, retail sales were rather subdued at just 8.2% year on year, reflecting greater caution among consumers. This is especially true for bigger ticket items such as jewelry, which grew at just 4.4% year on year. Additionally, auto sales were almost flat at just 2.8% year on year.

Trade Talk Updates Awaited

For now, the market will be closely watching to see further developments within the ongoing US/China trade negotiations. Several key readings have recently highlighted weakness in the Chinese economy due to the toll of the trade war.

And, this data clearly shows the extent to which the economy is relying on government fiscal stimulus. If negotiations can progress and the market starts to get a sense that a deal is likely, we should see a firm recovery within the Chinese economy. But, for now, more fiscal stimulus can be expected as the government continues to prop the economy up. All the while, it will be playing the waiting game over trade talks.

Technical Perspective


For now, USDCNH continues to track lower than the broad bearish channel running from last year’s highs. Price recently found support at the 6.6911 level, which was the late 2017 high. However, for now upside is being capped by the 6.7339 level. Above here, the next level to watch will be the 6.7811 where we have confluence between structural resistance and the bearish channel top.

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