The 3Q2018 GDP slowed to the weakest pace since 1Q2009 to 6.5% y/y. We are not surprised as the economy is increasingly hurting from the trade war between the US and China besides the deleveraging process. We remain fairly cautious on the outlook of the economy which is clearly softening with growing bearish sentiments.

While the government China plans to implement relatively tight monetary policy to force financial deleveraging and cut debt, the easier monetary conditions achieved through means like cutting banks' reserve requirements are seen as a tool to support growth. We expect another 150bps cut in the reserve ratio by 2019. Hence, we reiterate our 6.5% y/y GDP growth for 2018 and expect growth to slow to 6%–6.2% in 2019.

Meanwhile, we foresee the yuan to likely come under weakening pressure against the USD, with the psychological level at 7.00. The focus will be on how well the weak 3Q2018 GDP growth is digested, the PBoC’s guidance on the monetary tools and trade war tension. Thus, room for regional currencies to weaken cannot be ruled out, including the ringgit.

• 3Q2018 GDP slowed to the weakest pace since 1Q2009. The GDP grew 6.5% y/y in 3Q2018 versus 6.7% y/y in 2Q2018. We are not surprised with the data as the economy is increasingly hurting from the trade war, a view we have been maintaining since the start of the US-China trade war. Besides, it is also deleveraging.

• On the macro side, we noticed the recent data released was rather mixed i.e. (1) industrial production for September grew 5.8% y/y versus 6.1% y/y in August; (2) private sector fixed-investment which accounts 60% of total investment in China stayed flat at 8.7% in January to September, compared to the first eight months of 2018; (3) September’s factory gate inflation slowed down to 3.6% y/y from 4.1% y/y in August; and (4) retail sales and exports in September grew faster at 9.2% y/y and 15.2% y/y from 9.0% y/y and 10.3% y/y, respectively in August.

• There is also concern over the corporate debt which is at 165% of the GDP although the bulk is in domestic terms, with around 6.3% of the debt/GDP is dollar-denominated.

• Hence, we remain fairly cautious on the outlook of the economy which is clearly softening. Although the government plans to implement a relatively tight monetary policy to force financial deleveraging and cut debt, the easier monetary conditions achieved through means like cutting banks' reserve requirements are seen as a tool to support growth. Following the recent cut in the reserve required ratio by 100bps to 14.5%, we expect another 150bps by 2019 to prop up liquidity and support growth.

Source: AmInvest Research - 22 Oct 2018