Many investors misunderstand the recent changes in China’s economic policies, leading them to underestimate future growth.
We recently added T. Rowe Price New Asia to some of our Retirement Watch portfolios, so it’s important to understand the changes.
China tightened its economic policy about two years ago, because growth was higher than the country’s goals and the growth was fueled largely by debt. Growth slowed because of a combination of China’s tightening policies, the Federal Reserve’s tighter monetary policy and trade conflicts. These policies also led to slower global growth.
China ended its tightening policies in early 2018, much sooner than the Fed did, and followed them with stimulus policies. The stimulus led to higher growth.
With recent data showing that growth is exceeding policymakers’ goals, China announced this week that it would shift to a neutral monetary policy.
The change caused a lot of concern among China watchers. Many predicted lower growth for China and bad news for markets.
The concerns aren’t warranted, because of major differences between policy making in the United States and China.
In the United States, the Fed is independent. It often acts alone using only monetary policy to stimulate or restrain the economy. Rarely are U.S. fiscal and monetary policies coordinated. At times, monetary and fiscal policies in the United States are working against each other.
China uses a coordinated mix of monetary and fiscal policies to manage economic growth. Over time, policy makers seem to have learned to manage the two to reduce the volatility of the economic cycle.
Last year, China used monetary policy to increase liquidity by a significant amount. The recent policy change was to shift to a neutral monetary policy.
But in addition to the monetary stimulus, last year China initiated a series of fiscal policies such as tax cuts and infrastructure spending. These policies take longer to boost the economy than monetary policy. The economy still is responding to last year’s fiscal policies, and the policies still are in effect. The fiscal policies are likely to continue boosting growth for a while.
That’s why I think many people are misinterpreting the recent announcement from China and are too pessimistic about its growth over the next year.
In China, we now see signs of broad-based and sustainable economic growth. Monetary policy was shifted to neutral because growth looked like it soon might exceed the goal of 6% to 6.5%, and the economy responds to monetary policy faster than fiscal policy. The fiscal policies of last year will continue to support growth. As the effects of those policies wane, policy makers will re-assess the situation and decide whether growth near the target rate is sustainable or additional policy changes are warranted.
The housing data this week is mixed but tilts toward being positive, indicating that housing is recovering now that interest rates are below their recent peaks.
Housing starts aren’t matching the optimism we’ve seen in the Housing Market Index from the National Association of Home Builders (NAHB). In March, housing starts registered their lowest level since May 2017, and permits were at their lowest mark since August 2018. Over the last 12 months, housing starts are down 14.2% and permits have slid 7.8%.
But new home sales in March did reflect the builders’ optimism. New home sales were the highest since November 2017 and were 3% higher than in February 2018.
Yet, the median sale price declined 0.3% and is down 9.7% over 12 months, indicating builders are stimulating sales by giving discounts.
Existing home sales told a positive story.
For March, existing home sales are down 4.9% from February and 5.4% over 12 months. But that’s misleading because February’s sales were unexpectedly 11.8% higher than January’s sales. March sales still are well above the levels of December and January. The three-month average of sales is up 1.4%, which is the highest monthly increase since November. In addition, the median selling price increased 3.7% for the month of March.
Home prices increased 0.3% in February, compared to a 0.6% increase in January, according to the Federal Housing Finance Agency (FHFA) House Price Index. The 12-month price increase was 4.9%, compared to 5.6% in January. The 12-month increase is the lowest in four years.
Manufacturing is growing much more slowly, according to the Richmond Fed Manufacturing Index. The index was three for April, compared to 10 for March. New orders and capacity utilization were down sharply. Yet, expectations for the next six months were significantly higher than they were last month.
But Durable Goods Orders for March were unexpectedly strong. Orders increased 2.7% for the month, compared to a 1.1% decline in February. That’s the highest increase in eight months. Excluding transportation, orders increased 0.4%, compared to a 0.2% decline last month.
Core capital goods orders rose 1.3% following a 0.1% increase last month. Core capital goods are considered an indicator of business spending plans. Those core capitals goods orders have increased 2.8% over 12 months.
New unemployment claims shot up by 37,000 to 230,000. This jump was much higher than expectations. The surge follows several weeks of unexpected declines that brought the total below 200,000.
The S&P 500 rose 0.96% for the week ended with Wednesday’s close. The Dow Jones Industrial Average added 0.59%. The Russell 2000 gained 1.26%. The All-Country World Index (excluding U.S. stocks) dropped 1.07%. Emerging market equities fell 1.84%.
Long-term treasuries gained 1.07% for the week. Investment-grade bonds rose 0.68%. Treasury Inflation-Protected Securities (TIPS) added 0.77%. High-yield bonds inched up 0.08%.
On the currency front, the dollar increased 1.15%.
Energy-based commodities appreciated 1.21%. Broader-based commodities declined 0.31%. Gold gained 0.08%.
Bob’s News & Updates
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