Chinese GDP grew at 6.7% year-on-year in first quarter 2016. While this is smack in the middle of the government’s target band for growth this year it does represent a further slowdown in the pace of growth. Somewhat curiously, the deceleration in the quarterly growth rate to 4.5% quarter-on-quarter (on an annualised basis), the slowest pace since the start of this data series in 2011, was largely ignored by many commentators.
Exhibit 1 : GDP growth continues to slow in China
(the graph shows year-on-year (YoY) and annualised quarter-on-quarter (QoQ) GDP growth from 2011 through Q1 2016)
The data published on 15/04/16 showed fixed asset investment growth improved, driven by greater investment in real estate and infrastructure. Industrial production also grew at a faster pace in March 2016 than in December 2015 (data for January and February was not published due to the distortions created by China’s New Year celebrations). Electricity production, widely seen as a timely and less manipulated indicator of economic activity, also improved and cement production surged due to increases in homebuilding and higher infrastructure spending. Activity indicators based on a number of data series, such as the Bloomberg GDP indicator and the Li Keqiang index (named after the Chinese premier who favoured this gauge of economic growth), have turned up recently.
There are still weaknesses though. The recent improvement in exports was entirely due to favourable base effects. Retail sales growth has slowed, especially in real terms. At first glance a headline rise of 8.2%, year-on-year, for real retail sales in March looks impressive. It is however the slowest pace since 2004.
Exhibit 2: The latest data shows a slowing in the pace of real retail sales in China
(graph shows real retail sales (% on a year-on-year basis) and Chinese industrial production since 2000 through Q1 2016)
The employment components of China’s two manufacturing PMI indices improved in March, but continued to point to falling employment. The employment components of the services PMIs both fell (see exhibit 3 below). The overall composite employment component has been below 50 in all but one month since March 2014 and fell to its lowest on record in March 2016.
Exhibit 3: Data from China’s PMI indices for March 2016 point to a fall in the level of employment in both the manufacturing and services sectors
The housing market has turned up. Home sales surged in March and construction activity has responded. Our population-weighted average of price gains in the 16 largest cities was up by 17%, which is almost twice as fast as in the housing upturns in 2010 and 2014. It looks like another bubble may be developing.
At first sight, the data on Chinese exports published on 13 April 2016 appear to show a spectacular rebound in Chinese exports in March 2016. Exports fell by 25.5% year-on-year in February 2016 then rose by 11.5% year-on-year in March. In our view, financial markets were overly enthusiastic about the performance of China’s export data. These numbers were extremely distorted by the Chinese New Year – a period when Chinese trade data always weakens significantly. This year exports were up by 27.5% from the New Year trough. That is actually somewhat below the average monthly gain in the past five years.
An alternative way of looking at this data is to average the data for the first quarter. Exports in Q1 2016 were 9.7% lower than in Q1 2015. While there are some signs that the Chinese economy is stabilising after monetary and fiscal stimulus, we are not convinced that the trade data confirm such a trend.
Exhibit 4: In our view China’s latest trade data is not as good as it might appear at first sight
(China’s trade in USD billions from 2008 through Q1 2016)
In our opinion, any positive outlook for China can only be for short-term prospects, driven as it is by stimulative monetary and fiscal policy. The bigger picture reveals a backdrop of large imbalances such as overly high investment and surging debt loads. This remains an economy where GDP growth is structurally slowing as population and productivity growth taper off. Hence our somewhat sceptical view of the recent optimism about Chinese economic growth. [divider] [/divider]