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LGT Navigator: China fights liquidity squeeze

October 17, 2019

According to Chinese state media, China wants to relax business restrictions for foreign banks, brokers and investment companies. This was the result of a meeting of the government cabinet chaired by Prime Minister Li Keqiang. How this would be done and affect the economy remained open for the time being.

In addition to relaxing regulation for foreign banks, China will also support the efforts of local administrations to attract more foreign investment and give foreign investors more scope to borrow abroad. Stabilizing foreign investment is part of Beijing's policy to boost the slowing economy, which is visibly suffering from the trade conflict with the US. As more and more Chinese banks are currently struggling, liquidity and more financial stability is desperately needed.

Meanwhile, China's economy is likely to continue to lose momentum. The GDP growth figures for the third quarter, which will be announced on Friday, should continue to fall relentlessly from +6.2% to +6.1% year-on-year, according to expectations. This would indeed be the slowest expansion since the beginning of available recordings, even lower than during the economic slump in 2008/2009. At the same time, labor market data point to a stable situation, although others indicators already show a picture of rising unemployment, such as representative street surveys.

In the jungle of China's rather obscure economic indicators, there are also other, under-the-radar indicators, such as the percentage of unused commercial space. At 21.5% in the third quarter 2019, the office vacancy rate in China's 17 largest cities is as high as it was during the financial crisis. As a reference, in Lujiazui, on the banks of Shanghai's Pudong Rive, a highly sought-after location, vacancy rates climbed from 3% to 16% within three years. The Chinese office market is being shaken by a combination of forces: overseas companies are waiting for an end to hostilities in the Sino-US trade war before committing to new leases; skyscrapers built during the boom years have created oversupply; and cost-conscious tenants are moving to cheaper properties as the economy picks up.

US buying mood waning

US retailers suffered an unexpected decline in sales in September. Their revenues fell by -0.3 % compared to the previous month and thus for the first time since February, according to the Washington-based Department of Commerce. Economists surveyed by Reuters had predicted a plus of +0.3% after growth of +0.6% in August. Consumers bought lesser vehicles and building materials and made less online purchases last month. Consumption makes up circa two thirds of US economic output. However, the current low unemployment rate supports the still good American buying mood.

Stagnating European banks

Six of the region's leading banks are expected to report stagnating total revenues in the third quarter, according to Bloomberg analysts' estimates. The collapse in earnings of European banks is likely to deepen as the economy weakens and negative interest rates play an increasingly important role in the lending business. The export-oriented European economy is suffering from international trade disputes. These are reducing demand for banking services and making it more difficult for some companies to repay their debt. Negative interest rates – the European Central Bank's panacea –  could help shaken companies, but further hit banks as profitability suffers.



Economic Indicators October 17

MEZ Country Indicator Last
08:00 Switzerland Exports (m/m) -4.4%
08:00 Switzerland Imports (m/m) 1.0%
14:30 USA Initial jobless claims (week of the 10/12/19) 210,000
15:15 USA Industrial production (m/m) 0.7%

Earnings Calendar October 17

Country Corporate Period
USA Philip Morris International Q3



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Source: LGT Bank (Switzerland) Ltd.

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Core Personal Consumption Expenditure
MEZCountryIndicatorLast08:00DERetail Sales (y/y)-1.7%08:45FRConsumer Prices EU Harmonized (y/y)1.4%09:00ESGDP (y/y)2.4%09:55DEUnemployment Rate5.0%11:00EUGDP (y/y)1.2%11:00EUCore Consumer Prices (y/y)1.1%11:00EUUnemployment Rate7.5%11:00ITConsumer Prices EU Harmonized (y/y)0.8%12:00ITGDP (q/q)0.12%14:15USADP Employment Report102k20:00USFederal Funds Target Rate2.5%
08:00DEExports (m/m)-0.89%08:00DEImports (m/m)0.49%08:45FRIndustrial Production (y/y)0.11%10:00ITIndustrial Production (y/y)-1.80%10:30GBIndustrial Production (y/y)-0.80%14:30USConsumer Prices (y/y)1.81%14:30USInitial Job Claims (thousands)219.45
USAAlcoaQ3NetherlandsASMLQ3USABank of AmericaQ3USAIntelQ3SwitzerlandTemenosQ3

Stagnating European banks