China on Friday reported the slowest pace of growth in decades, as the world’s second-largest economy expanded 6.0% in the third quarter.
That was shy of estimates. Consensus was looking for a 6.1% print.
Although the headline figure is, of course, managed, it still betrays the drag from the trade war and underscores the inherent precarity of the country’s ongoing efforts to control leverage and transition to a more sustainable growth model amid a sluggish global economy and a bitter feud with Washington that threatens to spiral into a new cold war.
Activity data for September showed industrial output rising 5.8%. That’s better than expected (consensus was 4.9%) and represents a rebound from the 17-year nadir hit in August.
Retail sales rose 7.8% last month, matching estimates, while January-September fixed asset investment rose 5.4%, slightly below expectations.
The data comes on the heels of generally uninspiring trade data earlier in the week which showed exports falling 3.2% and imports plunging 8.5% last month, a sign that domestic demand was flagging in the face of the trade tensions. Obviously, a larger Chinese surplus due to flagging imports is the worst-case scenario from a global perspective.
Earlier this week, the IMF cut its outlook for global growth again, citing the trade war as a major impediment. The ongoing import malaise in China means the country is exerting downward pressure on global demand at a time when geopolitical uncertainty around trade policy has weighed heavily on sentiment, precipitating a widespread factory downturn which finally made landfall in the US late in the summer.
Meanwhile, data out Tuesday showed factory deflation becoming more entrenched in China last month. Producer prices fell 1.2% from the previous year in September. As noted when PPI deflation first reared its ugly head over the summer, that’s a drag on the outlook for global inflation, and works at cross purposes with central banks’ efforts to reflate.
At the same time, exploding pork prices are dragging consumer inflation higher, putting monetary policy in a potential bind – cutting rates (or otherwise easing policy) risks exacerbating the situation on the CPI side even as it may help alleviate the weak momentum evident in falling PPI.
The PBoC injected a surprise $28 billion in liquidity this week ahead of Friday’s GDP and activity data. The 200 billion offered through MLF came even as the next wave of maturities is still weeks away. That suggests Beijing is looking to keep the wheels greased with longer-term liquidity. China may well cut the MLF rate when some 400 billion yuan in loans come due next month. That would pave the way for the new LPR to fall later in November.
Also this week, total social financing printed above expectations for September (2.27 trillion yuan versus an estimated 1.9 trillion) as did new yuan loans. The robust credit growth data came as the latest broad RRR cut went into effect on September 16. A targeted RRR cut was implemented on October 15, and another will take effect midway through next month.
The market has cast a wary eye at Donald Trump’s “Phase One” trade “deal” cemented with little more than rhetoric and a handshake between the US president and Vice Premier Liu He last Friday.
Although the tariff increase scheduled for this week was averted, there is still no word on whether the White House will be willing to cancel an escalation set for December 15, when a 15% duty will be applied to $160 billion in Chinese goods.
Friday’s numbers may come as something of a relief given that a sub-6% print was avoided and the September activity data is generally in line, but the writing on the wall is clear – the engine of global growth and trade is still decelerating.