Earlier this morning, in “You Will Listen While I Talk About That Data From Japan And China,” we said the following about the most recent deluge of “misses” from the world’s most important economy:
Much like the miss on July trade numbers, the Chinese data wasn’t as bad as it could have been under the circumstances and we were coming off pretty robust June numbers.
China’s economy is slowing down. And it’s probably going to slow down some more in H2. The stronger currency isn’t helping and neither is the push to de-risk the system by reining in speculation and leverage (trying to target that effort so it only affects speculation and doesn’t choke off credit to the real economy is a difficult balancing act).
But this is a politically sensitive year for Beijing. It seems exceedingly unlikely that they’re going to allow the bottom to completely fall out if they can help it. And this isn’t the bottom falling out:
Make no mistake, there’s every reason to worry about China.
For instance, no one (including and probably “especially” Beijing) has any idea how to deal with what SocGen once hilariously characterized as the “mind-boggling web of cross-holdings between banks and NBFIs as well as among NBFIs.” That is of course a reference to the absurdly convoluted shadow banking complex that the PBoC desperately needs to get a handle on.
Additionally, China accounts for pretty much the entirety of global private sector credit creation, so the idea of Beijing deliberately squeezing leverage out of the system and tightening is disconcerting at a time when DM central banks are set to embark on their own tightening push.
And see that’s actually the point – with so much to worry about in China, the notion that a small miss on some headline prints that are essentially made up by the NBS anyway is hardly what we need to be concerned about.
Below, find a great piece from Cameron Crise that reinforces our assessment of both Monday’s data and last week’s July trade numbers…
There is an old saying that “nothing is certain except death and taxes.” These days, we can probably add a third inevitability: that someone calls for the implosion of China’s economy or credit market. This week’s poor growth data may add fuel to the pessimistic fire. In reality, however, it simply reflects the new normal of Chinese growth.
- It seems like China provides an endless source of reason for investor concern. From the explosive growth of debt in the economy to the rickety state of local government finances to property and commodity bubbles to capital flight worries, China bears have a broad menu of factors to select from.
- A funny thing happened on the way to the meltdown, however; the authorities have managed to keep the balls in the air longer than pessimists have managed to maintain profitable positions. The recent rally in the yuan against the dollar bears all the hallmarks of a speculative capitulation.
- This week’s poor industrial production and retail sales figures appear to raise the specter of another cyclical downturn, particularly when coupled with news that the authorities are once again trying to clamp down on commodity speculation.
- But how much do marginal changes in the y/y growth rate of key variables tell us? Not a whole lot. Indeed, for the past two and a half years industrial production and retail sales growth have been trundling along within a fairly narrow trend path. Monday’s “weak prints” are actually consistent with the trend growth rate.
- If you follow demographics you know that China’s economic growth rate is on a long glide path downwards thanks to a declining working-age population. Obviously, making short-term trading or economic calls based on demographics is usually a lousy idea. On the other hand, completely forgetting the secular trend isn’t always a good idea, either.
- While there are legitimate reasons to be concerned with China’s long-term future and financial stability, in the short to medium term the authorities can usually bring more firepower to the table than the pessimists. It usually pays to listen to watch what they are up to. With push-back both at home and abroad on rampant buying of foreign assets, it looks like more Chinese capital may stay at home.
- While that may eventually sow the seeds of the next bearish narrative, for the the time being “steady as she goes” may be the most accurate, if somewhat boring, forecast.