CHINA: J.P. Morgan On China Potential Growth & Policy Areas To Focus On

Mar-28 02:14

The US bank notes lower potential growth in coming years and outlines potential policy reforms that can improve the outlook.



J.P. Morgan: "A confluence of domestic and external shocks has lowered China’s potential growth ...

… and it is likely to slow further to 3-4% over 2025-30. China’s incomplete recovery points at a negative output gap of 2-3%pts, weighing on inflation.



The negative output gap and divergent cross-sector performance jointly explain most urgent macro problems faced by the Chinese economy, i.e. deflation pressure, structural unemployment problem, weak income expectation among upper-middle income households and a shift from consumption upgrade to “value-for-money” consumption.



What can be done to deal with these problems? The government seems to be aware of them but not, in our view, take them seriously enough. Even within the market, there are two lines of different proposals that focus on cyclical and structural aspects, respectively. The cyclical view is that the government should step up counter-cyclical fiscal and monetary easing, or adopt a “whatever it takes” approach to close the negative output gap. The structural view focuses on the imbalances in the economy, calling for a shift of policy support for household consumption and domestic demand, and measures to restore confidence in the non-SOE sector.



In the current situation, we think both cyclical and structural measures are important, but our bias is that structural measures are more important, as they not only address the near-term cyclical problems but also helps to lift potential growth in the long run. In addition, it is not only negative output gap, but more importantly also a demand-supply imbalance that has contributed to the unique deflation phenomenon in China after reopening.



In our view the government needs to more aggressively promote domestic demand through policy (e.g., trade-in program, policy support for childcare and elderly care, measures to crack down overdue salary payment, and improved social safety net), while being pragmatic about the pace of adjustment in policy headwind sectors (to reduce near-term drag, restore employment and income expectations and improve market confidence). A stepped-up public housing program is also important, in part to offset the contraction in commodity housing activity and in part an indirect way to support consumption (public housing is another form of government transfer to the household sector). These measures will involve increased support from fiscal and monetary policy, but not necessarily a massive stimulus. A change in policy direction and improvement in policy environment (more transparent, predictable, market- and rule-based) could fill the gap that stimulus economic policies cannot achieve."

Historical bullets

AUD: A$ Weaker, Finds Support Against Kiwi

Feb-27 02:07

Aussie is generally weaker during the APAC session today with Australian and US equities weaker but has found a trough as HK/China equities are slightly lower. AUDUSD is down 0.1% to 0.6538, close to the intraday low of 0.6531, while the USD is steady.

  • Aussie is stronger against the kiwi though breaking above 1.06 again to be up 0.1% to 1.0609 today. The RBNZ meets tomorrow and is expected to leave rates at 5.5% but sound cautious (see RBNZ Preview).
  • AUDJPY is down 0.2% to 98.37, close to the low. AUDEUR is down 0.1% to 0.6023 and AUDGBP is slightly lower at 0.5155.
  • Equity markets are mixed with the ASX down 0.1% and CSI 300 and Hang Seng -0.2% and the Nikkei +0.3%. The S&P e-mini is slightly lower. Oil prices are little changed with WTI around $77.56/bbl. Copper is 0.1% higher and iron ore around $115/t.
  • Later the Fed’s Barr and Schmid speak, as well as the ECB’s Elderson and BoE’s Ramsden. In terms of data, there are US preliminary durable orders for January, December house prices and February consumer confidence. Tomorrow Australian January CPI prints.

AUDNZD: Implied Overnight Vol Spikes To 12m Highs, Ahead OF Key Event Risks Tomorrow

Feb-27 01:58

The AUD/NZD cross continues to oscillate around the 1.0600 level ahead of key event risks tomorrow. We have the RBNZ decision, along with Jan monthly CPI in Australia.

  • The RBNZ outcome should have the bigger sway on the cross. An on hold outcome may see a knee jerk move higher in the pair, given some very modest pricing of a hike. Still, the RBNZ outlook will be very important as well, given cuts priced towards the end of this year.
  • The AU-NZ 2sy swap spread sits at -110bps, slightly up from recent lows (-117bps), see the chart below.
  • Not surprisingly, AUD/NZD overnight vol has spiked, now at 16.6%. This is the highest levels since early 2023. The implied range for the cross in the next session is 1.0504-1.0713 based off a 75% probability.
  • Outside of tomorrow central bank driven risk, relative commodity price trends will another watch point for the cross. Since the start of the year such trends have favored NZD over AUD, with metal prices, particularly iron ore weakness in focus amid on-going China demand concerns. In contrast, dairy prices have generally trended higher.
  • The other line on the chart is the ratio of AU to NZ commodity prices, proxied with a DB series for AU and CBA series for NZ.
  • Key levels to watch include 1.0560/70 (YTD lows Feb 22/May 23, Yearly Lows) a break here could signal a move to 1.0474 (Dec 22 lows), to the upside are 1.0612 highs from Feb 22, above there 1.0650/55 (Feb 20 highs/ 20-day EMA). Currently, the 20 and 50-day EMAs are positioned at 1.0655/1.0705.
Fig 1: AUD/NZD Cross Versus AU-NZ 2yr Spread & Relative Commodity Prices

Source: MNI - Market News/DB/CBA/Bloomberg

RBNZ: MNI RBNZ Preview – February 2024: Watching, Waiting & Worrying

Feb-27 01:55
  • The RBNZ is probably still “watching, worrying and waiting” thus there is no incentive to change rates in either direction and while we don’t expect a rate hike, we believe it will want to keep policy and thus financial conditions restrictive until it is confident that inflation will or has returned sustainably to the 1-3% target band.
  • There's a 27% probability priced in for a 25bp hike during this week's meeting, with an anticipated terminal OCR of 5.65% (reflecting a 60% probability of a 25bp hike) by the May meeting. By year-end, a cumulative 41bps of easing is factored into the pricing.
  • Given we expect the tightening bias to be retained, we also expect that the MPC will discuss a rate hike but then opt for no change. Updated staff forecasts will be presented and will be monitored for changes to the OCR path and CPI forecasts, especially upward revisions.
  • The RBNZ is likely to sound cautious and push back against rate cut expectations by saying it is too soon to talk about easing, discussing a rate hike or possibly pushing out the first cut in its OCR path. Given the high degree of uncertainty, the hold could be prolonged for most of this year.
  • See full preview here.