This clearly has short-term ramifications; there is a likelihood of further corporate defaults as cash flow squeezes and collateral margins are called in. Overly-indebted local governments will also feel the strain of this as payments stall and the central government calls on debt coupons.
However, the reaction from markets yesterday is clear that the region sees the likely response to these poor numbers is further stimulation. The Hang Seng, the China A50 and the Nikkei all took off post the numbers and rallied hard.
USD/CNY also moved higher after the print as the likelihood of the PBoC leaning on the exchange rate for longer looks inevitable now, although the fixing rate yesterday was increased to 6.1452 from 6.1475. The fact that the spot rate remains at 6.2188 means it's likely to see further weakness in the local currency.
With infrastructure projects already being brought forward and the PBoC willing to take on bad and doubtful debts, it’s likely that the next move in the stabilisation of the domestic economy will centre on employment.
The results from the HSBC numbers showed employment was decreasing at a faster rate than previous months, which continues the trend of 2014. The Third Plenum announcement at the end of last year stated that urbanisation is one of the key developments of the next decade. However, it has emerged that a government report released on the weekend showed that the percentage of people living in urban cities from 2013 to 2020 is only going to grow by 6.3%, down from 9.4% in the previous seven years.
Nomura believes this could shave off a further 0.5% from GDP - something the central government has to avoid. That is why I see this as the third part of a stimulus plan to increase domestic demand and stabilise the growth concerns. Expect increases in urbanisation project announcements over the next six months as the central government looks to keep employment levels at the predetermined levels.
EUR triggers risk strength
Developments in the currency space overnight were interesting as EUR triggered a broader sell-off in the USD. Overnight, France snapped out of a 13-month contraction in manufacturing and Germany maintained its expansion for the ninth consecutive month (although the expanding figure was lower.) This saw EUR/USD moving to 1.3877 on solid flows before easing slightly.
The strength in the EUR then translated to AUD and Goldman Sachs believes buy-stops were triggered and pushed up the Aussie to 0.9120, which then kicked up further on the lacklustre flash manufacturing data from the US, which saw more USD weakness taking the AUD to 0.9131. It will be interesting to hear Deputy Governor Philip Lowe has to say about the currency in his speech at the ASIC annual forum.
Ahead of the Australian open
We are currently calling the ASX 200 down 30 points on the 10am bell (AEDT) to 5315; this will be the fourth test of the 5310 support level. I see the moves from the US as moderate overnight and therefore believe this level should hold once more. However, any further downward pressure from a macro or technical level is like to see this finally broken, meaning the next level will be 5280.