As July 9th comes closer, the trade war has become increasingly a concern for the markets. The data is the self-imposed deadline by the Trump Administration to reach trade deals before “liberation day” tariffs are reimposed. While there have been rumors that agreements are near with several major countries, one major trade partner hasn’t been mentioned: China.
After being hit with triple-digit tariffs, the US and China agreed to a “phase one” plan that would reduce tariffs while a more permanent agreement was reached. This means negotiations around China have until August to find an accord. Yet there has been scant news of progress in this area. And this is a major concern for other countries as well, such as Australia and Japan.
Still Managing to Grow
China has been continuously ramping up stimulus as its economy faces several threats. Already Beijing was making unprecedented moves to support the domestic economy that was threatened by the collapse of the housing industry. With tariffs, those efforts have been stepped up, and so far, economic indicators point to economic resilience in China.
On Tuesday, China’s Premier Li said that his country’s economy had “steady improvement” in the second quarter. He also went on to reaffirm the government’s aim to move China from being a major manufacturing hub to a consumer market. The idea is that domestic demand would be enough to sustain the country’s economy and it can decouple from global trends. This could also supply stability to countries that export to China, such as Australia. The trade war, for example, has hurt expectations for Chinese demand for iron ore. The price of this key commodity fell below $100/ton last month and has failed to recover ever since, putting pressure on the AUD.
The Measure of the Data
Whether the resilience continues will be the focus of the upcoming data at the start of next week. PMI figures can show the start of trends as they are the freshed economic data to come out. But there might be a bit of “bad news is good news” in this situation. That’s because underperformance in PMIs could be a sign for the Chinese government to step up stimulus.
Overperformance could mean that China is successfully dealing with the fallout from tariffs, and reduce apprehension around the lack of progress in reaching a deal. There will also be attention on the difference between the NBS and Caixin readings. The latter includes more export-oriented companies, and could have a better reading on the impact of the trade war.
What to Look Out For
The official NBS manufacturing PMI for June is expected on Monday to return to expansion to 50.4 from 49.5 in May. Last month’s reading surprised to the downside, falling back into contraction. The non-manufacturing PMI is projected to advance a little further into expand to 50.5 from 50.3 prior.
The private Caixin manufacturing PMI for June comes out on Tuesday and is expected to stay in contraction but improve to 49.8 from 48.3 prior. Then the Caixin services PMI reading comes out on Thursday, which is expected to advance further into expansion at 51.3 from 51.1 in May.
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