I am writing this ahead of the Chinese data dump that comes at the start of each month, but one months’ worth of economic data does not really change the situation. China is delivering lower growth than many investors are used to.
The Chinese economy expanded by just 5.9 per cent quarter on quarter – on an annualised basis – over the first three months of the year, making it the weakest period of sequential growth since 2009. Do not expect much better over the next few quarters, as the economy is facing both structural and cyclical headwinds. But the chance of an outright collapse – or hard landing – of the economy is not as high as many think.
There has been enough noise from the Chinese authorities to know they are committed to structural reform measures that will ultimately improve the sustainability of the economy. But the medicine could leave an unpleasant taste. The anti-corruption campaigns and restrictive environmental measures to control a quickly worsening pollution problem, as well as the government’s effort to limit local government debt and credit growth in the shadow banking sector, will probably mean weaker consumption and investment activities in the near-term.
Not all the bad news is down to the politicians, however. Some of the recent slowdown is cyclical in nature, which means – as the name implies – things can go up as well as down. Both the official purchasing managers’ index for manufacturing published by the National Bureau of Statistics and the figure tracked by HSBC ticked up slightly in April, although only the NBS number is above the key level of 50 indicating expansion.
This modest improvement brought speculation the economy may have bottomed out. I think it is still too soon to make that call, but the manufacturing numbers are closely correlated to activity in the industrial sector, and any positive news here is clearly good news for economic growth overall.
Similarly, a more constructive outlook on the global economy should be supportive of China’s export market.
Chinese trade data has been very weak. Exports fell 3.4 per cent in the first quarter of the year compared with a year ago. Some of that decline will be to do with the elevated ‘fake export’ figures being reported last year as a means to circumvent currency controls. But a lot was down to muted demand from countries such as the US and the distorting effects of the weather. Yes, the weather can still be used as an excuse even now. Demand should return now that the global economy is on track for better growth. Meanwhile, China’s plans to liberalise its currency – and the depreciation of the yuan that began in February – should provide some relief to exporters.
Second only to concerns about credit growth is the property market. The thunderous pop of the property market bubble bursting may end up being more of a faint wheeze if the government is to be believed. However, market activity has slowed notably so far this year, and official data showed a sharp drop in new home sales as well as the value of homes sold in March. This slowdown will hit economic growth, as property investment is such a large component of Chinese GDP.
Some investors may see further bad news as good news, as it means a greater chance of a stimulus package. However, despite the near-term headwinds, the government has avoided further broad stimulus measures, opting instead for a targeted ‘mini stimulus’ package approach. More of this type of selective fiscal intervention – rather than a full-blown fiscal stimulus package – is likely if the economy looks like slowing further.
What investors really need to take away from the Chinese story is that the underlying long-term growth trend should remain stable. The Chinese government looks like being able to continue striking the fine balance between supporting growth and controlling the financial risks facing the economy.
It will not be a walk in the park, but I do not think this is the banana skin that will cause markets to fall flat this year. I believe this mostly because China still has sufficient tools to correct itself and rebalance the economy should growth continue to stumble.
Kerry Craig is global market strategist of JP Morgan Asset Management
