A string of encouraging signals is making investors increasingly positive about China's economy

  • The prospect of a a U.S.-China trade deal and beefed up Chinese stimulus measures are leading to increased optimism about the world's second-largest economy this year, experts say.
  • Ken Peng, investment strategist at Citi Private Bank, sees "less worries about trade tensions" in 2019.
  • Now is the time to increase exposure to China in anticipation of a deal, says Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong.
Signs with the US flag and Chinese flag are seen outside a store selling foreign goods in Qingdao in China's eastern Shandong province on Sept. 19, 2018.
AFP | Getty Images
Signs with the US flag and Chinese flag are seen outside a store selling foreign goods in Qingdao in China's eastern Shandong province on Sept. 19, 2018.

After a string of headaches, some positive buzz appears to be brewing for China's economy.

The growing likelihood of even a limited trade deal with the United States combined with a ramp-up in Chinese stimulus are jointly making some experts more optimistic about the 2019 prospects for the world's second-largest economy.

The escalating trade war was a dominant narrative in 2018 and has seemed to hit both countries' economies and financial markets, with China largely seen as having taken the bigger blow.

The atmosphere, however, has changed after a 90-day truce began early in December. Negotiations in Beijing earlier this month were mutually hailed and more talks are in store. And the U.S. is reportedly even considering lifting tariffs to reach a deal. That is all helping create a positive atmosphere for some kind of agreement.

"The point is that both sides are now under a lot of pressure to get a deal done," Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong, told reporters on Tuesday, calling it "just something that has to happen."

LGT's base forecast is for a deal by the middle of 2019, but Hofer said now is the time to get into Chinese markets.

"I think it's perfectly okay for investors to take on China exposure now in anticipation of that," he said.

Political risk consultancy Eurasia Group said in a Thursday note it sees "increasing signs of momentum towards some type of interim deal" within this year. In its view, that'll be driven mostly by U.S. President Donald Trump's wish to calm markets and have a win to take into next year's expected re-election bid.

That doesn't mean, however, that the issue will be solved.

"The two sides have made only slight progress on the core structural issues at the heart of the trade dispute," Eurasia Group cautioned.

Still, experts say reduced tensions and no increase in existing tariffs would mark a significant breakthrough. And that, combined with Chinese measures to support the economy point to a better outlook.

'Grease in the engine'

China is set to announce GDP figures for 2018's fourth quarter on Monday. Economists surveyed by Reuters see growth having likely slowed to 6.4 percent against the prior year's fourth quarter. Official growth numbers — the veracity of which outside experts have long expressed skepticism — came in at 6.5 percent for the third quarter on a year-over-year basis.

While Beijing reportedly planned to set its growth target to a 6 to 6.5 percent range for 2019, any slight slide is unlikely to intensify, experts said.

"Economic growth should stabilize as the government releases additional stimulus, including corporate tax cuts, credit easing, infrastructure investment, and looser real estate rules in lower-tier cities," IHS Markit said Friday in a note.

Ken Peng, investment strategist at Citi Private Bank in Hong Kong, is also optimistic.

"I think, ultimately, we'll see less worries about trade tensions this year," Peng told reporters Thursday.

But even with a deal, he said, Chinese data in coming months, such as exports, will likely remain under pressure — a legacy of the early stages of the trade war.

"We think this negativity, a lot of it, is coming from the payback for the front-loading of exports ahead of tariffs last year," Peng said.

But China's increased pump-priming will ease the transition, he added.

"Liquidity has turned from targeted easing to broad general easing and the size is bigger," Peng said, adding that lower business taxes are likely to be the most important factor.

"As we move into the second quarter, I think the effects of stimulus will start to more than offset the drags from trade and other slowdown(s)," he said.

Alicia Garcia-Herrero, chief economist for Asia Pacific at French investment bank Natixis, also emphasized the importance of stimulus, but stressed it comes at a cost.

"China has been trying very hard to put some grease in the engine," Garcia-Herrero said in a talk to the Dutch Chamber of Commerce in Hong Kong on Wednesday.

And she said that, while stimulus wasn't effective last year, it's likely to work this year as authorities take stronger measures such as forcing banks to lower lending rates for small- and medium-sized companies.

"This is great for growth but this is worrisome in terms of moving backwards in China's financial liberalization because you're going back to more targets," she said.

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