China: Economy to slow further, CNY to remain flat - Danske Bank

According to analysts from Danske Bank, growth in China will get worse before it gets better. They expect USD/CNY to stay flat over the next months. 

Key Quotes: 

“We expect the Chinese economy to slow further in the short term but to recover from Q2 19. We look for a trade deal between the US to be reached at some point in Q2 after a 90-day ceasefire was agreed upon on 1 December between the US and China. We see clear signs that Trump wants to make a deal with China soon after his hand has been weakened by US stock market declines. He also wants to secure gains for voters in US swing states as part of the deal as he eyes the 2020 Presidential election campaign, which starts in 2019. China is also interested in a deal, as the trade war weighs on the economy. If we get a trade deal in Q2, it should remove a sharp headwind for the Chinese economy.”

“We expect fiscal and monetary stimulus to kick in more forcefully in 2019 and we might even see further policy easing. A decent household tax cut and lower tax burden for businesses may be in the pipeline. The sharp decline in bond yields witnessed in 2018 normally feeds through to the construction sector with a six-nine month lag. We thus look for a pick-up in construction activity as 2019 progresses.”

“The People’s Bank of China (PBoC) has eased policy three times this year by lowering the Reserve Requirement Ratio. We expect limited further stimulus on the monetary front but look for fiscal stimulus to consumers and businesses through tax cuts.”

“A halt to the CNY depreciation is set to be part of a coming trade deal. We also see a higher chance of the Fed pausing on its rate hike in H2. We thus no longer expect further weakening of CNY. We now expect USD/CNY to stay flat in the short term and decline slightly on a 12M horizon.”