China Kicks Off Key Week For Global Economy With Good News

On Saturday, we spent quite a bit of time discussing the extent to which the fate of the global economy hinges on China’s credit cycle and whether Beijing is ultimately successful in averting a hard landing by pulling the various fiscal and monetary levers at their disposal to juice activity.

There was good news on that front just hours after the above-linked post was published. China’s official manufacturing PMI ticked back into expansion territory after contracting for three consecutive months.

The official gauge printed 50.5 in March, from 49.2 the previous month, marking the biggest MoM jump since 2012 and besting all estimates. Importantly, new orders rose to 47.1, still in contraction territory (for the 10th consecutive month), but the best print since September. Meanwhile, the non-manufacturing gauge rose as well, to 54.8.

It’s incrementally good news and tired, old “the data is fake!” cries notwithstanding, will generally bolster the “stabilizing at a low level” narrative adopted by optimists. Here’s some possibly useful color from Goldman:

We see a few factors contributing to a higher manufacturing PMI in March: 1) commodity prices rose in March which could add upward bias to the manufacturing PMI readings; 2) activities resuming after the Chinese New Year holiday could also push up manufacturing PMI in March vs February — in historical years when the Chinese New Year date was similar to this year, March NBS manufacturing PMI rebounded by an average of 1.7pp vs February; 3) underlying growth momentum may have also improved as the previous policy easing started to show its support to overall economic growth.

Notably, this was the first hurdle in a week that will require market participants to navigate a minefield of key data points expected to shed further light on whether the global economy is in fact bottoming (ignore the horrible mixing of metaphors there). A raft of data out of the US and Europe has the potential to give already buoyant risk assets an additional shot in the arm to kick off the new quarter – or vice versa.

For China, the paradoxical downside is that the more signs of stabilization we get, the less necessary further monetary stimulus (e.g., RRR cuts) becomes. There were already questions about the relative wisdom about unleashing still more liquidity at a time when Chinese equities are in the process of “re-bubbling”, if you will. The CSI 300 surged an incredible ~29% in the first quarter.

“We think both RRR cuts (we forecast RRR cuts of 200bp for the remainder of 2019) and an administrative push to lower the bank loan rate (eg, the PBoC average loan rate declined by 28bp in Q4 2018) will continue in the coming quarters, while interest rates will likely be lowered further (we forecast two cuts — 25bp each in Q2 and Q3 — in the benchmark lending rate)”, Barclays Jian Chang, who nailed the PBoC in 2014, wrote last week, documenting the likely trajectory of policy going forward.

You’re reminded that the surge in credit growth in January (spike in the chart below) abated materially in February (steep drop-off on the right-hand side), although due to seasonal factors, it’s best to roll that data up.

“We think the improvement in average January-February credit growth (10.2% y/y, Dec: 9.8%) would support a rebound in Q2 activities, although we remain cautious on the sustainability of such a notable recovery”, Barclays went on to write, in the same noted cited above, adding the following:

We think a rebound of this nature is unlikely to repeat beyond Q1 and expect TSF growth to moderate gradually towards 9% by end 2019, in view of: 1) the NPC tone of no “flood-like” easing and the new principal of “stabilizing macro leverage and having TSF growth keep pace with nominal GDP growth”; 2) the PBoC governor Yi Gang’s remarks on less room for RRR cuts; and 3) the continued scrutiny of some of the strong TSF drivers, including on- and off-balance-sheet bill financing.

For his part, BofAML’s Ethan Harris reminds you that “it is important to state the obvious.” What is “the obvious”? Well, the obvious is that China is still very much a command economy.  

“Hence the key to credit flows is not what happens to reserve requirements and policy rates, but formal and informal efforts to stoke credit growth”, Harris continues, noting that “presumably, when the government tells banks to increase lending, they do so.”

It’s a little more nuanced than that, though. As we wrote on Saturday, it’s no longer just a question of whether there’s a will in Beijing to support the economy with stimulus. It’s also a question of whether there’s a way, given diminishing returns on credit growth, the possibility that demand (rather than supply) is the problem when it comes to credit and, relatedly, a clogged monetary policy transmission channel.

In any case, market participants will take whatever they can get when it comes to upbeat data surprises out of China, and the March PMI print will do in that regard.