China: Hard-landing fears are back - ING

Tim Condon, Chief Economist at ING, suggests that China’s hard-landing fears are back despite fading CNY devaluation worries.

Key Quotes

“There was a worrying sign of a further slowdown in export growth in yesterday’s manufacturing PMI data.

May was indeed a month to sell and go away, at least for investors in emerging market equities. The MSCI EM ETF declined 3.7%. We also infer from the fact that EM equities rallied 2.9% in the last 10 days of the month, despite CNY fixing depreciation/USD strength that investors increasingly appreciated CNY depreciation as flowing from the PBOC’s policy framework rather than as a harbinger of devaluation.

We think the PBOC’s more predictable USDCNY fixing policy took hard-landing fears off the table and ushered in risk-on in mid-February. We think the People’s Daily authoritative person interview put hard-landing fears back on the table and ushered in risk-off. Today’s 201 pip appreciation in the PBOC’s USDCNY fixing to 6.5688 was almost identical to 200 pip appreciation predicted by our model; the upside risk we saw from the PBOC’s apparent use of USD weakness to depreciate the CNY basket didn’t materialize.

Yesterday’s official manufacturing PMI data revealed the first fall in five months in the PMI input prices component. It came despite a 10% bounce in the average global crude oil price and a 1.53% average CNY depreciation. Korea’s data show that the USD export value growth slowdown in 2015 was mostly a price shock. It became a volume shock in 2016. The China data suggest renewed price weakness could intensify the contraction in the growth of export values. They also raise the question of where the weakness is coming from.”