There was good news and bad news for the Chinese economy on Friday.
Let’s start with the bad news. Growth was 4.6% in Q3, according to the NBS. That doesn’t sound overtly bad — and it was in line with estimates — but it was the slowest in six quarters, and remember: The deflator’s negative.
There was exactly no evidence to suggest the beleaguered property market’s poised to inflect for the better. Measured against the same month a year ago, new home prices dropped more than 6% last month, according to Friday’s data.
As the figure shows, this remains a truly egregious slump. Sales were down nearly 9% YoY, and property investment was 10% lower in the nine months through September versus the same stretch in 2023.
For the Chinese economy to truly stabilize, the property market needs to find a bottom. Maybe (probably) the NBS will “math” (and that’s an action verb here) their way to meeting 2024’s annual growth target, but with apologies to Wall Street’s “China strategists,” anyone who views the headline GDP print out of Beijing as something other than a very rough estimate is a gullible simpleton.
Sure, the NBS will tell you how they got to the number, but… well, we’re talking about an overbearing, one-party autocracy which sets a top-down annual growth target. That’s really all you need to know to understand why parsing the headline GDP print out of China is a mostly fruitless exercise. Is it “fake”? No. Not in a strict sense of the word. Is the NBS completely free to follow the data wherever it leads them? No. Want to dispute that? Ok, go to China, get a job at the NBS, then tell the Standing Committee “No” when they ask you to do something. Let me know how things turn out for you.
As noted above, the implicit deflator was negative for a sixth straight quarter, and a seventh in eight. That’s flattering the GDP headline — they’re using the deflator to Cinderella-pumpkin-coach real growth.
The good news Friday was that September’s activity data turned out ok, to the extent you believe it. Retail sales rose 3.2% last month, up from August’s moribund pace and the quickest since May.
Apparently, a lot of that fillip was refrigerators, microwaves and so on. Appliance sales soared more than 20% versus September of 2023. That’s obviously not organic demand. Government incentives were to thank.
Lackluster CPI data for September and a very poor read on imports both suggest domestic demand’s still tepid, though. The Party’s stimulus unveil, rolled out over several high-profile press conferences in recent weeks, doesn’t suggest Xi’s convinced that any sort of “helicopter money” is a good idea. China has a voucher program for lower-income households, but that’s not going to be sufficient.
Friday’s data also showed industrial output rose 5.4% in September, a decent outcome. The surveyed jobless rate was 5.1%, a three-month low.
It’s far too early in the stimulus push to draw any sort of conclusions, but that hasn’t stopped fund managers from turning more optimistic. The October vintage of BofA’s poll showed a rethink among panelists. A net 48% now expect a stronger Chinese economy.
As the figure shows, the inflection counted as an almost farcical about-face versus the prior month, when sentiment trundled to a hopeless nadir.
The Party seems hell-bent on harnessing the wealth effect from local equities to ensure hope floats between now and whenever the gloom lifts. On Friday, Xi dispatched PBoC boss Pan Gongsheng to talk up markets. It worked. Both mainland and Hong Kong-traded Chinese shares surged.
The property market, and also local equities, need special attention, Pan said. As Bloomberg dryly noted, he spoke “minutes” after the NBS released the Q3 GDP data.
Curious of opinions here… what would need to be true in order to consider China investable again?
Leader change. Note the emphasis. Not leadership change, necessarily and not regime change. But leader change.
Sure, it’d be nice if China marked a transition to democracy, but that isn’t going to happen, and for the purposes of an investment case, it doesn’t have to. The Party isn’t the problem. I mean, it is, but “only” from a good governance perspective. From an investment-case perspective, the problem’s Xi. He’s gotta go, and I don’t think that’s as lost on the Party as everyone believes.
(In no way, shape or form am I advocating violence when I say he’s “gotta go.” All I’m saying is that on the current trajectory, he’s going to end up becoming an out-and-out tyrant, and he may well lead China to ruin if he takes the PLA to war against the US Navy before they’re ready. At some point, the PLA probably will be ready, but I’m not sure how you — i.e., he — can accurately assess that ahead of time. The modern PLA is completely untested. Their preparedness for war with the US Navy is probably something they’ll only be able to assess after the fact, which in this case means after they’re in Tapei or at the bottom of the ocean, whichever the case might be. All “America’s an empire in decline” narratives aside, the PLA’s a heavy underdog in that fight currently. That may be different five or even three years from now, but only a lunatic takes that risk — the risk of open, state-on-state, old school military conflict with the United States — prematurely.)
Always insightful commentary. Thank you sir!