Exports rebounded unexpectedly by 1.1% y/y while imports fell more than expected at -8.5% y/y in May, bringing the trade surplus to US$41.66bil. The rise in May’s exports, which was largely due to front-loading, is not sustainable. We are of the view that the prospect of US sanctions on a new list of Chinese products, including popular electronics like smartphones, will again raise the possibility of increased shipments in June. Hence, it could again boost the exports’ total

Meanwhile, we feel the damage from the move by US President Trump could soon pose a severe challenge to China’s economy. Hence, we expect a downward trend in exports to kick in. The pain from tariffs will become more visible in 3Q2019. Though the current stimulus policies have been modestly successful, given the prospect of more US tariffs, further easing is expected to take place.

There is still plenty of room in interest rates, especially in the required reserve ratio rate (RRR) where we are pricing in two cuts, each by 50 basis points from the current 13.5% in 3Q2019 and 4Q2018. Besides, the policymakers will institute some fiscal stimulus measures. We are maintaining our 6.2% GDP growth for 2019 GDP as our base case. In the event of a full-blown trade war, we need to reduce the GDP growth by 0.6%–1.5%.

• Exports rebounded unexpectedly in May by 1.1% y/y from -2.7% y/y in April, beating market expectations of -3.8% y/y. It was due to companies front-loading their shipments to beat last month’s US tariff increase. Meanwhile, imports fell more than expected at -8.5% y/y in May from -4.0% y/y in April (consensus: -3.8%). The poor showing of imports was due to a plunge in shipments from the US and also weakening domestic demand. Thus, China registered a trade surplus of US$41.66bil in May versus April’s surplus of US$18.83bil.

• The rise in May’s exports, which was largely due to front-loading, is not sustainable. We are of the view that the prospect of US sanctions on a new list of Chinese products, including popular electronics like smartphones, will again raise the possibility of increased shipments in June. Hence, it could again boost the exports’ total.

• Meanwhile, we feel the damage from the move by US President Trump could soon pose a severe challenge to China’s economy. Hence, we expect a downward trend in exports to kick in. The pain from tariffs will become more visible in 3Q2019. The government may have to consider larger stimulus during this period when the signs of economic slowdown show up to support consumption in a move to offset weak exports which account for around one fifth of its GDP growth in 1Q2019.

• Though the current stimulus policies have been modestly successful, given the prospect of more US tariffs, we expect further easing to take place. There is still plenty of room in interest rates, especially in the required reserve ratio rate (RRR). We are pricing in two cuts for the RRR, each by 50 basis points from the current 13.5% in 3Q2019 and 4Q2018.

• Besides, the policymakers will institute some fiscal stimulus measures. We are maintaining our 6.2% GDP growth for 2019 GDP as our base case. In the event of a full-blown trade war, we need to reduce the GDP growth by 0.6%–1.5%.

Source: AmInvest Research - 11 Jun 2019