Obviously, China’s latest batch of econ (the trio of retail sales, FAI, and industrial output) could have been better.
Specifically, FAI during the first eight months of the year rose by just 7.8% or, to put it in perspective, the slowest pace of the century.
That’s cause for concern. Given that the country is the engine of global growth and trade, you don’t want to see the brakes slammed on.
Jitters about the Chinese economy are compounded by worries that Beijing’s deleveraging effort will end up choking off growth to the real economy as it’s simply not possible to tighten in such a way that there will be absolutely no collateral damage outside of the country’s labyrinthine shadow banking complex.
Still, the trajectory here is well understood by market participants so to call these misses on the headline numbers “surprises” would be something of a misnomer – especially considering the fact that these numbers are always a bit of a crap shoot anyway.
There’s little question that the cooling trend will continue, but again, it’s not 100% clear that the data we’re seeing so far is cause for anyone to be sounding alarm bells. Here’s Barclays with a measured assessment that reflects the general tone:
Activity data showed a broad-based moderation in August, for a second consecutive month. We think this reflects softer export growth, the impact from factory closures amid stricter environmental inspections in eight provinces, and fading quasi-fiscal support, while the housing market remains resilient. In contrast to a strong rebound in manufacturing PMIs and imports, industrial production growth declined to this year’s low of 6.0% y/y in August, from 6.4% in July, and FAI growth was weaker than expected, slowing to 7.8% y/y YTD from 8.3% in July. Given the average IP growth for July-August of 6.2% and a likely rebound in September activity following the conclusion of environmental inspections in eight provinces, we continue to expect a gradual slowdown in growth; we forecast GDP growth to moderate from 6.9% q/q saar in Q2 to 6.5% in Q3 and 6.3% in Q4. Continued strong excavator equipment sales of c.100 % y/y in Jun-Aug also point to strength in investment demand. That said, we expect pollution control measures implemented this year (e.g. the government set a hard target for pollution controls during the ‘heating’ season of Nov 2017 – Mar 2018) to be stricter than in previous years, which could be a swing factor for Q4 17-Q1 18 growth.
So again, one thing to keep in mind when you look at these numbers is that this isn’t entirely unexpected.
More notable than any one (or, in this case three) prints, is the ongoing yuan story. The PBoC has now cut the daily reference rate for a third day, weakening it by 0.13% to 6.5465 on Thursday. This comes after a long stretch of stronger fixings that coincided with dollar weakness and a record-setting win streak for the offshore yuan.
It seems like the PBoC ditched the reserve requirement on forwards knowing that move would put downward pressure on the currency and thus give them an excuse to start weakening the fixings. Additionally, Goldman notes that “the likelihood of the PBoC buying foreign exchange has increased in the last few days, but the reason would be reduced tolerance of the yuan’s rally rather than an intention to weaken the currency.”
That sounds like a ridiculous distinction (and it kinda is), but the point they’re trying to make is that beyond a certain pain threshold, the yuan rally starts to weigh on the economy and thus needs to be put in check. That’s as opposed to an economy that’s decelerating on its own and “needs” to be juiced by central bank intervention in the FX market (again, a somewhat dubious distinction, but you get the point).
“GDP received a lot of support from exports; acceleration in outbound shipment year-to-date contributed to a 1 percentage point improvement in GDP growth,” Goldman’s senior China economist MK Tang told Bloomberg in a phone interview, adding that “China wouldn’t want the yuan to be too strong, especially when fixed-asset investment will likely be affected by China’s deleveraging drive.”
There you go – there’s your context for Thursday’s econ. And sure enough, the onshore yuan was on pace to fall a fifth day on Thursday which would be its longest run of declines since early July.
Don’t forget that this all comes after the onshore yuan had its best month against the dollar since revaluation in August:
As we’re fond of reminding you, this may not be the easiest narrative to follow and it most assuredly doesn’t qualify as “entertaining” for most readers, but you absolutely have to keep track of it.
Just ask Donald Trump…