China: Stimulus with a weaker yuan – ING

Iris Pang, Economist at ING, explains that the China’s National Council has announced a stimulus package as the President Xi has emphasized the economy is being hit by external forces and needs measures to support growth.

Key Quotes

“Xi's message implies that the chances of getting a positive result from a trade negotiation between China and the US are small. That means that the possibility of the trade war escalating and continuing to drag on the Chinese economy is high.”

“That explains why, on the same day as Xi's comment, the National Council announced a stimulus package. Most of it concerns infrastructure investment.”

“The stimulus package does not contain any monetary values. But we expect the stimulus package to be comparable in size to the 2009 package. As GDP has more than doubled since that time, the stimulus amount will also increase. We believe the total package could be around CNY 9 to 10 trillion.”

“Our GDP forecasts are still intact as we consider the government's fiscal stimulus sufficient to provide support as trade tension escalates. We project GDP growth at 6.3%YoY in 4Q18, 6.2%YoY in 1H19, and 6.3%YoY in 2H19.” 

“But we do expect USDCNY to continue to weaken if the trade war continues. We are keeping our forecast of USDCNY and USDCNH at 7.0 by end of 2018, but have weakened the yuan pairs to 7.30 by end of 2019 (previously at 6.50).”