By Bas van Geffen, Senior Macro Strategist at Rabobank
China’s equity indices either did very well, or very poorly, depending on your reference. The country returned to work after a weeklong national holiday with a gain of 4.4% for the Shenzhen CSI 300 index. That’s less than half of the opening gains though – the CSI 300 opened the day with a 10.8% increase on the screens. Some investors may have used the first opportunity they had in a week’s time to sell some of their holdings and lock in a profit.
That also explains some of the sharp divergence between the green digits on China’s mainland exchange and the 7.8% drop in the Hang Seng index today. The Hong Kong exchange remained open last week, and the HSI had gradually continued to rise until today’s open. The drop in the HSI index arguably better reflects the latest sentiment. The government had scheduled another press conference for today, leading to expectations of further stimulus measures. However, the press briefing concluded with no additional measures being announced.
With a fairly thin data calendar this week, there is little distraction for German industry to hide behind. Industrial output wasn’t as bad as expected: production was down ‘only’ 2.7% y/y. That’s an improvement from the previous month (-5.3%) and it beat market expectations. However, this probably does not mark an improving trend for the manufacturing sector. Production in the automobile industry, which was the main reason for the output jump, fluctuates considerably from month to month.
Moreover, yesterday’s data also flag a sharp decline in new orders. Order books shrank 3.9% y/y, despite an increase in demand from non-Eurozone countries. Particularly demand in Germany itself is abysmal, indicating that German companies are still very reluctant to invest in capacity or more efficient production.
Given the importance of export orders for German growth, and particularly the export of cars to China, it is not surprising that Germany was amongst the countries that voted against Brussels’ plans to impose punitive tariffs on Chinese electric vehicles. Reuters headlined that this highlights “Berlin’s waning influence” in Europe.
Indeed, one way to interpret the split decision to impose additional tariffs is that China is successfully exploiting the different national interests to drive a wedge between the European politicians. But one would hope that there has been some backroom coordination in Europe, in order to limit the fallout of the EV tariffs. What if European politicians secretly agreed to vote in such a way that a) the tariffs would be passed; and b) those countries with a big reliance on exports to China can vote against, so that any retaliation will focus on less-vulnerable sectors?
Whether it was discord or coordination, the vote will probably focus Beijing’s attention on the agriculture sector, not cars. Germany and Slovakia –who both have a substantial car industry– voted against. Meanwhile, France, the Netherlands, Ireland and Denmark are amongst those countries that voted in favor of the tariffs. To retaliate against these countries specifically, China will have to focus on agricultural exports such as pork, dairy and (French) wines. Speaking of which, China has just announced provisional tariffs on French brandy.
