The Chinese growth slowdown that we’ve commented on in recent letters — which was underway well before the beginning of escalated trade tensions last year — will probably lead regional central banks to ease, or to remain steady rather than tightening monetary conditions in 2019.
While China has done some mild easing, we continue to anticipate more substantial moves from the Chinese government to boost credit expansion and the property market. We believe these moves will occur in the next few months, and will lead to increased economic activity indicators later in 2019.
For now, China’s regional trading partners which have open economies are showing the effects of the Chinese slowdown. Manufacturing is cooling off in response to decreasing Chinese demand. Cooling property values and household leverage in some regional economies suggest that household consumption trends are also weakening.
With inflation pressures low, this frees regional central banks either to ease outright (likely in China itself, in India, and in Malaysia) or to remain on hold rather than raise rates (for example, in Indonesia, Korea, Australia, Taiwan, the Philippines, Singapore, and Thailand).
Investment implications: We believe that China’s recent growth slowdown will be met with more robust policy stimulus in the next few months, which will then result in a pickup in economic activity later in 2019. Meanwhile, China’s regional trading partners, already suffering from lower Chinese demand, will likely either ease interest rate policy outright, or refrain from previously planned tightening. Again, these measures will likely boost market sentiment and activity after a period of several months.
