China: Credit growth slows further, tensions over Taiwan grow

Allan von Mehren Danske Bank A/S

Credit and money growth slowed further in March.As the chart to the right illustrates credit growth is now negative when measured on 6-month change. M1 growth has also continued to decline to underpin the picture of policy tightening (see chart one next page). We believe the tightening mostly reflects lower infrastructure growth. The residential construction sector is still underpinned by strong home sales, though (chart 2). However, tighter policies should cool down home sales and the construction sector in H2. PMI data for March were a bit mixed but we put the most weight on NBS PMI manufacturing, which suggests the manufacturing sector saw some relief in March. Looking ahead,we expect it to fall again due to the policy tightening.

Concern over commodity prices. On Thursday 8 April,China’s Financial Stability and Development Committee warned that authorities “should keep a close eye on commodities prices”. On Sunday, China’s premier Li Keqiang said that China will strengthen controls on raw materials markets to help limit costs for companies.

Tensions over Taiwanintensify. While the US over the past years has stepped up diplomatic relations with Taiwan officials, China’sresponsehas been to increasingly flexits muscles around Taiwan. US Secretary of State Antony Blinken said on Sunday, the US is concerned about China’s aggressive actions against Taiwan.Beijing on the other hand is blaming the US for raising the tensions. An editorialin China Daily last week stated that the US was playing with fire by sailing warships through the Taiwan Strait. A new billon how to confront China further is currently going through the USCongress. Among other things,the 280-page bill states that Taiwan plays “a vital part of the United States Indo-Pacific strategy” and that there should be no restrictions on U.S. officials’ interaction with Taiwanese counterparts.I wrote about the brewing Cold War 2.0 in Research China -"At the foothills of a new cold war -"and what it implies, 31 July 2020.

USD/CNY has stabilized lately around 6.55 but is still in the upward trend starting early this year.As chart 7 shows it broadly mirrors the moves in EUR/USD. We still look for more upside in USD/CNY, see The China Letter -"Tide is turning for USD/CNY amid slowing Chinese growth.

China has fined e-commerce giant Alibaba Group over monopoly conduct.The group founded by Jack Ma was imposed the fine of USD2.79bn based on China’s antimonopoly law for “exclusive dealing agreement” that hindered competition, see Xinhua. China’s giga-companies are under increased scrutiny for not exploiting a dominant market position. Regulators have also clamped down on Jack Ma’s Ant Group to become a financial holding company under their supervision in order to fight financial risks, see SCMP.

China’s vaccinations continue at a higher pace of 2-2.5% of the population per week (chart 8).

Chinese bond yieldsarestill range trading, while stocks have corrected lower this year.So far,it still looks like a bull trend, though.

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Allan von Mehren

Danske Bank A/S

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