Travelling day, hence this shorter post.
CHINA’S ECONOMY IS SLOWING HARD, JUST NOT OFFICIALLY
China’s National Bureau of Statistics released its preliminary estimate of third quarter annual GDP growth on Monday. At 6.9% it expanded at a fractionally faster rate than analysts had anticipated, but it remains well above our own measure of China’s economic activity which points to growth closer to 3.0%.
As always, China’s GDP data were released well in advance of other national statistics agencies, and the numbers (which sit comfortably within the target range of “around 7.0%”) are rarely revised.
We are finding these official statistics increasingly difficult to square with the collapse in commodity prices on which China’s economy depends. China’s supposedly mild GDP growth deceleration is also at odds with the non-manufacturing PMI — as displayed in our chart.
We also find it curious that the relationship between China’s GDP deflator and its headline inflation rate has changed. With the deflator for the third quarter of this year dipping back into deflation, this could be related to the overstatement of China’s real GDP data.
Fathom is using the official PMI. Markit’s services PMI is holding better even though
At 50.5, the PMI measuring service sector business activity fell in September to the second-lowest seen since the survey began in 2005.
Business optimism about the year ahead in the service sector fell to one of the lowest levels seen in the near ten-year history of the survey. Inflows of new business also almost ground to a halt. The drop-off in optimism and order book growth suggest the service sector could suffer a contraction of activity in October.
Only 22% of companies expect their business activity levels to be higher in a year’s time against 5% expecting a decline. This compares with 31% and 6% respectively this time last year (and 55% and zero respectively nine years ago).
The rate of job cutting eased slightly but remained at a pace not seen since the height of the global financial crisis in early-2009. A modest upturn in service sector staffing levels helped offset the largest loss of factory jobs for just over six-and-a-half years.
The ongoing drop in employment is a major worry for a government keen to ensure social stability, suggesting that more policy action may be forthcoming as the authorities seek to prevent any undesirable upturn in unemployment.
NO CHINA HARD LANDING
Andy Rothman, Investment Strategist at Matthews Asia has a more upbeat view:
(…) From our perspective, however, the most important points are that retail sales growth accelerated slightly, signaling that consumers shrugged off the A-share market fall, and that for the first time ever, services and consumption accounted for over half of China’s GDP—an important milestone in the rebalancing process. Oh, and that 6.9% growth, on a base that is about 300% bigger than it was a decade ago (when GDP growth was 10%) means that the incremental expansion in China’s economy this year is about 60% bigger than it was back in the day. (…)
For the first time ever, services and consumption (the tertiary* part of the economy) accounted for more than half of China’s GDP, at 51.4%, up from 41.4% a decade ago. This mitigates weakness in manufacturing and construction (the secondary* part), and, if this rebalancing continues, it should mean that macro deceleration will be gradual.
Net exports (the value of exports minus that of imports) contributed a small (-1.8%) negative drag on GDP growth.
The rebalancing is driven by China’s consumers, with consumption accounting for 58% of GDP growth during the first three quarters of this year.
Shrugging off the mid-June fall in the stock market, real (inflation-adjusted) retail sales actually accelerated to 10.8% last month, up from 10.4% in August, and the fastest pace since March.
The consumer story is not, however, immune from the overall deceleration trend, with real retail sales up 10.5% over the first three quarters of this year, down from 10.7% during the same period last year, and 11.4% and 11.6% two and three years ago, respectively. We expect this number—and most economic data points in China—to continue to grow more slowly every year, but we also expect this deceleration to continue to be gradual.
(…) Manufacturing weakness has led to the development of a distinct “rust belt” in China, where industries related to construction and natural resources extraction are concentrated. In these five provinces, GDP growth in the first half of this year was about 5%, and unemployment is undoubtedly higher than the national average. But GDP growth was about 8% across the other 26 provinces (home to 84% of the national population). (…)
There are signs of a small government stimulus. Outstanding bank loans rose 15.4% through September, up a bit from 13.4% through June and 13.2% a year ago. Overall credit growth, known as Total Social Finance (TSF), however, rose 12% through September, up from 11.6% in June and down from 14.2% a year ago. This difference reflects two factors. First, bank loans are a larger share of TSF this year (75%) compared to last year (60%) and in 2013 (51%), as the Communist Party has cracked down on so-called shadow banking. Second, many local government loans, which were included in TSF calculations, have been converted to government bonds, but those bonds are not included in TSF.
On the other hand, the growth rate of investment in public infrastructure—the Party’s main stimulus lever in 2009—slowed last month to 14.6%, compared to 19.5% in August, 17.2% in July and 18% a year ago.
These numbers signal that the Communist Party leadership remains relatively comfortable with the state of the economy, and has taken only small steps over the past few months to stabilize the growth rate of investment, which has cooled a bit more than expected, in part because an inventory overhang in property has resulted in a 14% decline in new home starts this year. Although that has contributed to slower economic growth, it is a positive sign that developers are waiting for the recent sales pickup to draw down inventory before resuming new construction.
The modest rise in credit growth, along with the healthy consumer story, should result in continued modest macro deceleration in the coming quarters—far from the hard landing some have anticipated.
EARNINGS WATCH
- 65 companies (20.5% of the S&P 500’s market cap) have reported. Earnings are beating by 2.3% (4.5% ex-Financials) while revenues have missed by -0.7%.
- The beat rate is 63% on EPS (70% ex-Financials), 32% on revenues.
- Expectations are for a decline in revenue, earnings, and EPS of -3.8%, -5.3%, and -4.1%. Ex-Energy, these would be +1.7%, +1.9%, and +3.2%. This excludes the likelihood of beats, which have been above 4% over the past three years. (RBC)