Fundamental analysisoverview and forecast for second half 2019 – Q3 and Q4

Our data and Base Effect Comparison point us to lower growth and high inflation for the chinese economy in the third and fourth quarter 2019:
Our Main forecast for second half of 2019
High inflation
Slightly lower growth.

China Growth:

The main GDP components (industrial production – retail sales – consumption expenditure) have been declining for several quarters.
The advanced indicators of growth indicate a continuation downwards but with a slight lower Momentum.
This signals that perhaps we start tracing a bottoming in the Chinese economic slowdown.

What makes china’s economy to slow?

Through our analysis, we determined three principle reasons for the economic slowdown in china.

     1)   New structural reforms by the Chinese authority:

The Chinese government has changed its strategy and way of conducting business; it is now more oriented to develop the services sector and new technology more than other industries.
In addition, china turned its attention to its citizens, trying to enhance and increase their consumption and buying attitudes.

     2)   Global economic slowdown

Many regions around the world, especially developed and emerging countries, are facing growth headwinds, which makes china exports and activity to slow.  

     3)   U.S China trade war

Trade war escalation between the United States and China weighted much negatively on both countries.
Investors are watching anxiously successive negotiation failures one after another between Trump and Xi.  

Second half 2019 economic growth forecast:

The average of 4 months before each quarter, for the advanced indicators of growth, indicates an average growth of 0.04% in Q3 QoQ and -1.1% in Q4. this signals a stabilization in Q3 and a slight decrease in Q4-2019.
Also, for each indicator on a monthly basis.
Manufacturing PMI: a bottoming
Non-manufacturing PMI: downward

Retail sales are decreasing despite consumer confidence is marking a record high.
Industrial production: decreasing
Investments : we see fixed asset investments is a long term trend: bearish.
And foreign direct investments are descending from a july top of 7.3% year on year.
This last observation is because of the U.S. china trade war that pushes foreign investors and specifically Americans to go looking for other cheaper places and comparable to the potential of China such as Singapore, Vietnam, India ….

China Inflation

We always see a high CPI. Despite most leading indicators of inflation predict the opposite.

For the inflation Base Effect Comparison the bar of the base effect is below the CPI realized, and easy to stay above for Q4-2019 and Q1-2020.
A drop in the base effect bar for OIL can also help steady high inflation.
On the other hand, the general trend of commodities prices is still bearish.
In addition, we see a decline in the trend of house prices. the china newly built house prices is decreasing to 8.8% change YoY in august from May top of 10.7%. 
The money supply of the chinese central bank, people’s bank of china, is still in a downtrend.
In general: despite all these indicators against the high trend of inflation, we see two main elements that keep inflation rising:
1) The price of oil is estimated around 55$, above the fourth quarter 2018 price of 45$. which makes the percent change, of the same period from a year ago, higher
2) A dovish people’s bank of china: which has injected an open market operation tool, LOAN PRIME RATE, it is currently the benchmark rate for interbank credits. 
the Loan Prime Rate is released monthly ou the 20th day of each month.
it is decreasing from 4.31% to 4.25 and now at 4.20 in august.