Asian markets took a deep dive into the negative territory following another disappointing China Caixin Manufacturing PMI reading.

The reading of 49.7 is below consensus forecast of 50.1 and falls into contraction territory for the first time since June 2017. Hang Seng Index tumbled nearly 3 percent in the morning trading hours. Resurging in haven flows fuelled the rally in gold and Japanese Yen, both of which reached their highest level in over six months.

China manufacturing PMIs is falling at a pace faster than economists’ forecast, suggesting global economic slowdown and trade war is hurting the country’s manufacturing activities.

Confidence is hurt before material impact kicks in, as companies and businesses are holding back capex spending and recruitment, or considering shifting their factories out of China to South East Asia to mitigate trade uncertainties. This brought negative impact on the broader business sentiments and further dampened investment activities.

Market outlook for 2019 is challenging as the Chinese economy is facing domestic and external headwinds amidst slower pace of global growth.  China economy is probably going to seek stability after two-year of deleveraging campaign, which hurt many companies and the financial market as loan growths slow down.

Lower pace of GDP growth, M2 and loan growth is going to be the ‘new norm’, while the economy becomes less investment and debt-driven, more reliant on consumption and high-end manufacturing and technology development. Downside is cushioned by relative low valuation, which has already come to four-year low. The upside is determined by policy shifts (tax cut, monetary & fiscal stimulus) as the government debt level allows room for more constructive fiscal policies.  

Monetary policy is likely to remain prudent and accommodative, with small-scale monetary easing to support targeted SMEs. There is also room for further cuts in banks’ Reserve Requirement Ratio to free up liquidity. Massive monetary stimulus such as broad-based interest rate cut is unlikely because that would signal a reverse of the deleveraging efforts over the past two years

The policy maker needs to balance the trade-off between monetary stimulus and yuan depreciation, without leading to a surge in non-performing loans.

USD/JPY

By Margaret Yang in Singapore

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