Additional monetary and fiscal expansion is needed to fight economic slowdown

The Chinese economy has turned further slowdown in Q3 2018, with investment remained stagnant and final consumption growth dropped. Business confidences in both manufacturing and service sector fell as indicated by the deceleration of official PMIs. Against the backdrop of such negative sentiments, we believe the Chinese economy will continue to be on a deceleration trajectory for the rest of the year. The market tends to attribute the slower growth to the US-China trade war, but the ironic reality is that China’s exports continued to gain ground, even from the US market. Thus, China’s economic slowdown is more likely to be a result from domestic issues such as lower return on capital, than external shocks. To improve the negative sentiment, the Chinese authorities escalated their fiscal and monetary expansion schemes in the latest high-profile Politburo meeting. However, the monetary transmission has not been effective to lower the funding cost of the real economy. Although the 3M SHIBOR fell to 2.79% in mid-August, the lowest level since the beginning of 2017, total social financing remained sluggish at 10.6% YoY. Clearly, the Chinese government has realized the domestic difficulties, and is trying very hard to deter from the pessimistic scenario, but it needs more efforts to reach targets. Due to the negative sentiments in the economy, we expect the growth to further slowdown in Q4 2018.