Chinese official activity data for December mostly surprised positively, echoing an earlier PMI revival. With the PBoC cutting reserve requirements further at the start of the year, local governments stepping up issuance of infrastructure bonds and a “phase 1” US-China trade deal now concluded, is the economy on track to recover in H1 2020?

Monetary trends suggest not. Six-month growth rates of the narrow and broad money measures followed here were little changed in December, having fallen since Q2 2019. Credit expansion also remained cool – see first chart. (Note: the GDP numbers used in this chart were subsequently changed - see here.)

The “monetarist” interpretation is that the improvement in economic data at year-end reflected a recovery in money growth in early 2019, which went into reverse after the first of several regional bank failures in May and an associated tightening of credit conditions. The post-Q2 monetary slowdown suggests a relapse in economic data from Q1 2020.

The US-China trade deal locks in the bulk of recent tariffs, probably until 2021 (or later), and may result in President Trump redirecting his protectionist energies towards Europe.

Will the latest PBoC reserve requirement ratio cut, along with better economic data and additional fiscal spending, result in an easing of credit conditions in early 2020? The CKGSB corporate financing index for January, released towards month-end, will be an important data point: it continued to soften in December – second chart. Any recovery in credit conditions and money growth in early 2020, though, would be unlikely to be reflected in economic data until late in the year.