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China outlines new targets for this year


  • Chinese Ministry of Finance released a set of targets for this year including GDP and deficit
  • Reserve Bank of Australia kept rates on hold as expected
  • US dollar leads the gains in G10, lacklustre trading across equity markets in Asia

Stimulus is coming

The Chinese economy will aim to reach GDP growth between 6% and 6.5% this year giving the government more leeway to maneuver. The China’s economy expanded 6.5% last year being hit by a trade dispute with the United States. On top of that, we got a bunch of other targets, the most important points are presented below:

  • VAT tax covering manufacturing and other sectors will be cut by 3 percentage points to 13%

  • VAT tax for construction and transportation will be lowered to 9% from 10%

  • The govt will work toward simplifying a VAT system

  • Budget deficit will be 2.8% of GDP compared to 2.6% of GDP last year

  • Fiscal revenue will rise 5% while spending 6.5%

  • Spending on defense will rise 7.5%

  • The govt plans to sell 2.15 trillion yuan special local bonds and 930 billion general local bonds

  • To govt will “resolutely” curb new hidden local government debts

  • Infrastructure spending will reach 577.6 billion yuan, up by 40 billion yuan compared to 2018

After the government decided to cut taxes last year it saw a massive decrease in tax revenue combined with slower economic growth. Source: Bloomberg

There is no doubt the ruling party aims to revive the stuttering economy even at the expense of more leverage. This tactic could be positive for the China’s economy in the short-term but it is unlikely to address the long-term downward trend in economic growth. Meanwhile, the report released overnight included a pledge to keep a basically stable leverage ratio in 2019, a sign that policymakers hope that increased fiscal spending and tax cuts will translate into a rebound in economic growth. While the China’s leverage ratio has stabilized in recent years, it remains very high hovering under 300% (government, non-financial corporations and households). It is worth adding that unlike previous years, there were no targets set for retail sales or fixed-asset investment for 2019. For market today’s report seems to be fairly neutral - the Shanghai Composite is trading 0.3% higher while the Hang Seng (CHNComp) is moving around the flat line. Asian indices were rather indifferent to China’s services PMI (Caixin/Markit) for February which produced a fall to 51.1 from 53.5. As a result, the composite index slipped last month to 50.7 from 50.9.

RBA stays on hold

The EURAUD is trading nearby its important supply area following the RBA’s rate decision. Source: xStation5

On the currency front we see broad-based strength of the US dollar, however, the gains are rather mild. The largest loser in the morning’s trading in the New Zealand’s dollar being almost 0.4% down. The Australian dollar is also trading lower (0.2%) in the aftermath of the RBA’s rate decision as well as the balance of payments data. The latter showed a current account deficit in the fourth quarter equal 7.2 billion AUD beating the median estimate of a 9.2 billion AUD deficit. Nevertheless, a net exports contribution to GDP growth for the final three months of 2018 was -0.2% falling short of the consensus of -0.1%. This reading along with the yesterday’s disappointing data on inventories suggests a downside risk to the fourth quarter GDP release due on Wednesday. The Reserve Bank of Australia also concluded its meeting this morning European time, albeit it did offer nothing new. The bank reiterated that low rates were supporting the economy and it still expected progress in unemployment and inflation. The RBA added that some indicators suggested that economy slowed over the second half of 2018. The Australian central bank also added that trade tensions remained a sense of domestic uncertainty.

In the other news:

  • Australian CBA/Markit services PMI fell to 48.7 in February compared to 49.3 announced initially

  • New Zealand’s commodity price index increased 2.8% MoM in February after rising 2.1% MoM in January

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