The Daily Update - China...signs of change

For the first time in history a Chinese president will be welcomed at the annual World Economic Forum in Davos, Switzerland. Although not formally announced, reports suggest Xi Jinping is set to attend the summit to be held at the alpine ski resort in January next year; previously Chinese premiers have attended, but never a president. With expectations that the meeting will be overshadowed by Brexit, the anti-establishment movement in Europe and the US presidential transition, we expect Mr. Xi will have a much wider stage than ever before to push China’s global influence and pro-trade stance. The China-led Asian Infrastructure Investment Bank and One Belt, One Road initiative will likely garner much attention as the US, under a Trump administration, is expected to reshape trade agreements and pull out of Obama’s TPP deal.

Staying with China, both global and domestic demand appear to have improved as trade data releases for November materially rebounded, exceeding market expectations. Exports gained 5.9% while imports were up 13%, in renminbi terms;  this was the first month of positive export growth, measured in US dollar terms since March this year. We expect exports to come under pressure if the US does go ahead to restrict imports from China, although China has a multitude of options to turn to and is currently in talks with the UK, which we expect could be one of  China's closest allies going forward. Trade between the two nations stood at just under $80bn last year.

China’s imports jumped the most in over two years off the back of a surge in copper, crude, iron ore and coal demand. The combination of a weaker currency, and stronger commodity prices suggests China’s PPI will continue to push higher. Higher PPI inflation should lead to increased corporate profitability, as these two measures have historically been positively correlated. Higher and more stable inflation has aided the PBoC in shifting to a more neutral monetary policy stance.

Stronger PMI data and significantly better trade data in November suggests further economic stabilisation. Next year should be an interesting one as policy tightening within the housing sector for example and upgrades to supply-side reform start to filter through, coupled with the government's more proactive fiscal push alongside a more neutral to tighter monetary stance. China’s growth expectations will be met this year and should remain on a progressive trend, between 6.5%-6.7%yoy, going into the first quarter of 2017, with an upward mom surprise expected for Q4’16.