China's economy continued to slow at the tail end of 2018, with the latest figures hinting at mounting troubles. The December official manufacturing PMI dropped to 49.1, below expectations and the lowest since July 2016. Industrial profits for November also took a hit, falling 1.8% on a monthly basis, marking the seventh consecutive monthly decline and the lowest reading since January 2016.
"Our views for 2019 remain the same: we expect a much worse slowdown in H1, followed by a more serious and aggressive government easing/stimulus centred on deregulating the property market in big cities, and then we might see stabilization and even a small rebound later this year," summed up Ting Lu, economist at Nomura, in a January 2 note. "We believe markets are still not well prepared for the incoming much worse slowdown, and are too complacent on government support."
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A significant policy meeting in China took place just ahead of Christmas. The China Economic Work Conference concluded on December 21, and the meeting's summaries noted that China's policy direction in 2019 is likely to be one of moderate stimulus to the slowing economy.
Proactive fiscal policy is to be more powerful and effective, with larger scale tax cuts and more sizeable issuance of special local government bonds, UBS Securities noted in a December 22 report.
"While the conference kept monetary policy 'prudent', it called for 'appropriately abundant liquidity'," the report noted. "We expect multiple [reserve ratio requirement] cuts, more use of liquidity facilities, modest rebound of overall credit growth, and lower market interest rates without benchmark rate cut."
Reform will continue to be in focus, with an eye to the wish list of the US given the ongoing trade war. Some of the areas highlighted included SOE reform, intellectual property protection, private sector support, and domestic market opening up.
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Foreign investors' attitudes towards RMB assets seem mixed. The Hong Kong Exchanges and Clearing reported that it had hit a milestone of 500 registered investment accounts for the Bond Connect scheme, according to a notice by the exchange. HKEX added that 66% of the accounts were opened in the form of various investment products. Thirty-six out of the global top 100 asset managers had either on-boarded or were in the process of registering to enter the scheme.
However, central banks seem to take a more cautious view. The latest release of FX reserve allocations data provided by the International Monetary Fund showed that RMB-denominated holdings fell slightly, the only category across the special drawing rights basket of currencies, for the third quarter of 2018. RMB holdings fell 0.2% to $192.54bn. Total FX reserves fell 0.6% to $11.396tr, while dollar-denominated holdings rose 1% to $6.631tr.
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The US and China exchanged bittersweet gifts over the holidays, which leave the trade war prospects for 2019 in an uncertain light. Media reported positive signals, including the first rice imports from the US to China, as well as the likely arrival of a trade delegation in Beijing at the start of January. Further, China's Ministry of Finance announced it would cut or eliminate tariffs on as many as 700 items effective January 1.
The developments did not prevent analysts from calling for caution.
"The US-Chinese trade talks are set to reach some conclusion by March 1," wrote Marc Chandler, chief market strategist at Bannockburn Global Forex, on December 23. "It is difficult to see a meaningful agreement in such a short period. [Robert] Lighthizer who is leading the US negotiations recognises this, but what it means for the threat to increase the 10% tariff on $200bn of imports from China to 25% and/or imposing a tariff on the remaining imports from China is not clear."
Some salvos were fired. Secretary of State Michael Pompeo stated on December 20 that Chinese state-sponsored hackers had been responsible for attacks on global network providers and their clients since 2014.
But US president Donald Trump ended the year on a buoyant note.
"Just had a long and very good call with President Xi of China," he tweeted on December 30. "Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!"