Monthly Economic Review: China

Hello, forex friends! According to a November 11 report from China Daily, Premier Li Keqiang “promised that China will use several powerful policy weapons to boost growth,” which included a promise to “reduce companies’ costs of financing.” Woah! Does that mean more surprise rate cuts? And how is China’s economy doing lately, by the way? Let’s a take a look, shall we?

Growth

China’s Q3 2015 GDP grew by 1.8% quarter-on-quarter (+1.8% previous), but it only grew by 6.9% on an annualized basis (+7.0% previous). This is below the PBoC’s annualized target growth rate of 7.0% and also happens to be the weakest expansion since Q1 2009. The details of the report show that all sub-components were clearly seeing some growth, though. As examples, industrial production, which accounts for around 30% of Chinese GDP in terms of output, grew by 5.8% while agricultural production and wholesale & retail trade, which both contribute roughly 10% to GDP apiece, grew by 4.3% and 6.1% respectively.

According to a separate report from the National Bureau of Statistics of China (NBS), however, exports dropped by 1.8% in the first three quarters of 2015 while imports slumped hard by 15.1%, with the total value of both imports and exports contracting by 7.9% year-on-year. Another factor mentioned in the report that contributed to the downtick in expansion was investment in fixed assets growing by only 10.3%, which is lower by 1.1% when compared with the first half of the year.

And Q4 2015 doesn’t look too good since, as Jack the Pipper wrote in his recent piece, exports have been decreasing for the fourth consecutive month, with October’s exports slumping by 6.9% after a 3.7% drop in September. Moreover, investment in fixed assets only grew at an annualized rate of 10.2% year-to-date, which is the slowest growth ever since 2000.

Source: National Bureau of Statistics of China

Business Sentiment & Conditions

Moving on,  the officially-sanctioned manufacturing PMI reading from the NBS and the one from Markit-Caixin are at odds again since NBS is saying that China’s manufacturing sector is slightly contracting, but everything’s chill since October’s reading remained unchanged at 49.8. Meanwhile, Markit-Caixin seems to be saying that the slump in manufacturing has bottomed out, or that the slowdown is slowing down at least, since its reading climbed higher to 48.3 from 47.2. Dr. He Fan, Caixin’s chief economist, opined that this could be an indication that “previous stimulating measures have begun to take effect.”

Interestingly enough, the “Production” index from the NBS reading printed a 52.2 figure (52.3 previous), which means that production is actually expanding. According to Markit-Caixin, however, production continued to fall, albeit “at the weakest rate in four months.”

They did both agreed that employment was declining, though, with Markit-Caixin noting that October’s decline “[extends] the current sequence of job shedding to two years.” For its part, NBS merely noted that the “Employed Person” index ticked lower to 47.8 from 47.9.

Another interesting thing from the NBS report is that both the “New Export Orders” and “Import” indices both indicated further contraction, with the former down from 47.9 to 47.4, and the latter down from 48.1 to 47.5.

Moving on,industrial production for the October period advanced by 0.46% on a monthly basis (0.38% previous), but only grew by 5.6% year-on-year (5.7%), with the manufacturing sector growing the most at 6.7%. And while growth, even at a slower rate, is always better than a contraction, just know that annualized industrial production has been slowing down for some time and is currently approaching November 2008 lows.

Consumer Spending & Sentiment

Despite the deteriorating employment conditions in the manufacturing sector, Chinese consumers still seem to be a happy bunch since the Westpac MNI China Consumer Sentiment Indicator for October is still above the 100.0 mark, but consumer confidence apparently took a hit since it sank to 109.70 from 116.50.

The drop in consumer sentiment also apparently placed a dent on consumer spending given that the monthly reading for retail sales only increased by 0.83%, which is slower than the previous increase of 0.87%. But on a more upbeat note, retail sales grew by 11% year-on-year, which is the fourth consecutive month of increasing annualized growth in retail sales. In addition, all retail trade sub-components saw increases, with the “petroleum and related products” being the only exception since it saw a 7.1% decrease.

On a more downbeat note, the value of new yuan-denominated loans for the October period was only 514B yuan (1,050B yuan). This could reflect lower levels of investment or lower levels of consumer spending, neither of which is really good for growth in the long run.

Inflation

China's CPI dipped back into the red in October (-0.3% current, 0.1% previous) after three months of increases. The poor monthly reading was primarily due to a 1.0% in the food component, thanks mostly to a 6.9% drop in the price of eggs and a 5.6% decrease in the price of fresh vegetables.

Source: National Bureau of Statistics of China

The annualized reading isn’t doing very as well since it only registered a 1.3% (1.6% previous), marking the third consecutive month of decreasing CPI readings. The main drag was the 1.9% slide in the “Transportation and Communication” component due to a 15.5% slump in the “Fuels and Parts for Vehicles” sub-component, so the decline in oil prices still seems to be weighing-in on the annualized reading.

Source: National Bureau of Statistics of China

Summary & Conclusion

Overall, China’s fundamentals look pretty bad, but there are signs that China’s economy is transitioning from an export/investment-driven economy into a consumer-driven one given the relatively strong levels of consumer spending. And while the latest PMI readings seem to hint that past easing moves are beginning to take effect, China still needs to address the slowing investment in fixed assets, so more stimulus may indeed be needed. That’s great and all, but what does all that mean for forex trends? Well, it means that China’s slowdown will continue to weigh-in on commodity prices, and hence, the comdolls.