China - Expect front-loading to kick in August

In July, exports rebounded to 3.3% y/y from -1.3% y/y in June while market expectations stood at -2.0%. Meanwhile, imports continued to decline albeit at a smaller pace of -5.6% y/y from -7.3% y/y in June (consensus: -8.3%). Thus, trade surplus stood at US$45.05bil in July from US$50.97bil in June.

Despite the latest export print showing some signs of stabilization, we expect the momentum to be short-lived as there will be a 10% tariff on US$300bil of Chinese exports to the US effective 1 September. Front-loading export activities will be even more intense in August, before the September tariff deadline. However, we do not expect exports to benefit significantly as the gradual depreciation will be insufficient to counter the rising tariffs.

• In July, exports rebounded to 3.3% y/y from -1.3% y/y in June while market expectations stood at -2.0%. Meanwhile, imports continued to decline albeit at a smaller pace of -5.6% y/y from -7.3% y/y in June (consensus: -8.3%). Thus, trade surplus stood at US$45.05bil in July from US$50.97bil in June.

• Exports in July were primarily supported by commodity-related items i.e. coal rebounded significantly to 50.9% y/y in July from -20.4% y/y in June. Meanwhile, non-resource based products were seen improving slightly with mechanical & electrical products rising 2.9% y/y from -1.6% y/y in June while hi-tech products recorded a smaller decline of -0.2% y/y in July from -2.1% y/y in June.

• Although imports slowed down significantly, we noticed commodity imports negated some downside pressure with soybean purchase as it recorded a smaller decline of -8.0% y/y from -37.0% y/y in June while iron ore imports accelerated by 68% y/y in July from 34.6% y/y in June.

• Nevertheless, the economy continues to show a lack of progress in reducing trade surplus against the US as imports from the US are falling at a faster rate than exports. Exports declined by 6.5% y/y in July from -7.8% y/y in June while imports fell 19.1% y/y compared to -31.4% y/y in June. The average trade surplus against the US in 2019 eased slightly to US$24bil from US$27bil for the whole of 2018.

• Despite the latest export print showing some signs of stabilization, we expect the momentum to be short-lived as there will be a 10% tariff on US$300bil of Chinese exports to the US effective 1 September. Front-loading export activities will be even more intense in August, before the September tariff deadline. Given that this will be a one-off factor, we expect Chinese exports to remain depressed starting next month due to the escalating trade tension amid a moderating external environment.

• Despite the PBoC continuing to state that it would not engage in "competitive devaluations", we still expect the yuan to weaken in 2019 due to softening economic growth caused by additional tariffs. However, we do not expect exports to benefit significantly as the gradual depreciation will be insufficient to counter the rising tariffs.

Philippines - BSP to unwind rates

In-line with market and our expectation, Bangko Sentral ng Pilipinas (BSP) cut its interest rate by 25bps to 4.25% for the second time this year since May. The decision came hours after reports showed the economy slowed down to a four-year low of 5.5% y/y in 2Q2019 from 5.6% y/y in 1Q2019.

With benign inflation in the economy as well as policy makers intends to get the economy above 6% growth in 2019 amid higher likelihood of aggressive rate cuts from the Fed, we expect BSP to cut another 25bps in September’s meeting. In addition, we still foresee room for BSP to cut its reserve requirement ratio (RRR) which currently stands at 16% for big banks.

• In-line with market and our expectation, Bangko Sentral ng Pilipinas (BSP) cut its interest rate by 25bps to 4.25% for the second time this year since May. The decision came hours after reports showed the economy slowed down to a fouryear low of 5.5% y/y in 2Q2019 from 5.6% y/y in 1Q2019.

• Underpinned by higher borrowing cost and budget delay, the consumption in the economy weaken - unable to offset the decline in capital formation. In 2Q2019, both government and household consumption decelerated to 6.9% y/y and 5.6% y/y from 7.4% y/y and 6.1% y/y, respectively in 1Q2019. Meanwhile, capital formation shrank 4.8% y/y in 2Q2019 compared to a gain of 6.4%y/y in 1Q2019.

• Besides, the growth was dragged by adverse weather conditions following El Nino hitting onto rice and corn output coupled with water crisis in Metro Manila that weighed on consumer confidence.

• As a result, the central bank opted to resume policy easing to support domestic economic growth while countering the rising external headwinds. Nevertheless, we believe the economy will perform better in 2H2019 due to projected recovery in household spending and accelerated implementation of government's infrastructure spending program.

• BSP also lowered its inflation forecast in 2019 to 2.6% (prev: 2.7%) and 2.9% (prev: 3.0%) for 2020 while also revealing its forecast for 2021 inflation of 2.9%. With benign inflation in the economy and policy makers intends to get the economy above 6% growth in 2019 amid higher likelihood of aggressive rate cuts from the Fed, we expect BSP to cut another 25bps in September’s meeting.

• In addition, we still foresee room for BSP to cut its reserve requirement ratio (RRR) which currently stands at 16% for big banks. However, we believe policy makers will assess its rate cut transmission into the real economy before timing its RRR cut.

Source: AmInvest Research - 9 Aug 2019