Talking Points
China's economy continues to recover. We look at data for the first month of the trade war. BoJ and BI kept rates steady. Where to next for markets?
Last week began with what should have been the highlight of the week. On Sunday, the Chinese government released its promised “Special Action Plan for Boosting Consumption” and followed up with a press conference on Monday to answer questions. You can read my summary, which I wrote on Monday, here. The purpose of this Action Plan, I think, was less to announce new policies and more to put Party cadres at all levels on notice that increasing household income and consumption are now their top priority.
And indeed, there were few concrete proposals in the Action Plan. A doubling of the central government budget for subsidizing consumer goods trade-ins — and a broadening of the kinds of products covered by the policy to include popular electronic items like smartphones — was most people’s main takeaway but this had already been announced weeks ago.
The Plan also promised a more “scientific” approach to increasing minimum wages, which I take to mean that they’ll rise by more than last round’s 9.4% average when they are next increased either this year or next. The government also seemed to commit to a higher labour intensity of construction on infrastructure projects — more ‘make work’ projects. And pensions to the elderly and infirm and subsidies for education and health care will rise too.
The goal is to both increase household incomes directly and to reduce the precautionary savings motive by easing households’ burdens to provide care for the elderly and to provide education and childcare for their children. All very sensible but this second part of the project will take time. People will be willing to save less if they see these welfare services being delivered reliably.
Ultimately, though, households will spend more when they have greater confidence in their future incomes and confidence among Chinese households — like those in perhaps most other countries — is in short supply these days. The pandemic is still a recent memory, economic growth is a little weak so jobs are less secure, and Trump’s tariffs have introduced a new source of uncertainty.
The National Bureau of Statistics’ monthly ‘data dump’ provide more positive news on the state of the Chinese economy, the consumer especially. Retail sales of goods are a little firmer — for automobiles especially — but not for services. Fixed assets investment growth likewise is rising. If we try to deflate both series by a reasonable price index, real growth rates are probably rising faster than the nominal data suggest. Importantly, property prices are stabilizing in more cities and actually rising in a few; property sales fell at their slowest pace in two years. For a third time since the market peak in 2021, the property market looks like it is stabilizing. There’s a better chance this might be durable.
Central banks in Japan, Indonesia, the US and Taiwan held monetary policy meetings this past week and, as expected, all of them kept rates unchanged. But while the data and Fed decisions and commentary were viewed as dovish, the opposite was the case in Japan. Rising inflation in Japan added to the market’s concern.
While equities broadly had a moderately positive week, it was a very difficult week for investors in Indonesia. The equity market tumbled 4.9% on the week to be down 14.9%ytd, the worst in APAC. The 10yr bond yield rose 13bps while almost all other APAC bond markets rallied, and the IDR fell 1% against the dollar.
In the rest of this week’s note, I’ll look at the data we have for the first month of Trump’s trade war; review the data from China suggesting that the economy continues to improve; discuss the Bank of Japan and Bank Indonesia monetary policy outlooks; and look at markets over the past week and where we might go from here.
