NO SIGN OF A SLOWDOWN: Macquarie says an escalating trade war with the United States is yet to impact China's industrial sector

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  • A trade spat between China and the United States has escalated into an outright trade war in recent months, seeing both sides introduce tit-for-tat tariffs on the others exports totalling hundreds of billion of dollars.
  • However, based on activity signals from early October, the trade war has yet to have a meaningful impact on China’s industrial sector.
  • Macquarie Bank expects similar outcomes in official Chinese economic data, something that will support assets closely aligned to the performance of the Chinese economy such as the Australian dollar and copper.

There’s little evidence that an escalating trade war with the United States is impacting China’s industrial sectors, according to Macquarie Bank’s China Business Cycle Indicator, or MCBCI for short.

“The MCBCI continued to track sideways in October, with a modest dip to 50.8, well within the range that could be accounted for by statistical volatility,” Macquarie Bank said.

“This suggests that there is little evidence that the imposition of US tariffs on Chinese exports – the latest escalation took effect on 24 September — has had a meaningful impact on Chinese industrial activity.”

The indicator aims to estimate activity levels across China’s manufacturing sector from one month to the next, and is similar in construction to PMI reports.

However, it is released in advance of those better known activity measures, making it somewhat of a lead indicator on what to expect.

Macquarie Bank

Based on the latest results, Macquarie says there’s little evidence to suggest that activity levels deteriorated further in October.

“While both the NBS and Caixin PMIs fell in September, we feel that the dip was probably more a reflection of deteriorating sentiment than an indication of weaker activity,” Macquarie says.

“Consequently, we expect a modest rebound when the PMIs for October are published at the end of the month.”

Following the staggered introduction of tiered tariffs on Chinese goods entering the United States in recent months, Macquarie says it is now on alert for signs that recent fiscal and monetary stimulus measures introduced by Chinese policymakers are feeding through activity levels in the economy.

“While it will take some time for these measures to gain traction, it is likely that they will be enough to offset the impact of the tariffs in the short term, with a risk that China surprises to the upside,” Macquarie says.

“The next key data point will be Chinese credit, which should show a modest rebound in local government bond issuance, which will in turn be a sign that infrastructure spending is beginning to rebound.”

Updated monetary growth figures for September from the Chinese government could arrive at any point this week, possibly on Friday when Q3 GDP data is released.

Given so much bad news has been priced into financial assets closely tied to the performance of the Chinese economy, Macquarie says any positive surprises could see recent losses reversed.

“We expect China proxies such as copper and the AUD to benefit from the more positive data flow,” it says.

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