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Lower Industrial Output Could Impact China’s Market

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China’s industrial output slowed in April

China’s (FXI) economic activity slowed down more than expected in April 2017 due to fading factory demand. Markets are anticipating a gradual slowdown in the world’s second-largest economy mainly due to the recent clampdown on credit to control its rising debt. We’ll discuss these issues in detail in this series.

In the following chart, let’s look at industrial production in China over the last year.

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Industrial output in China

China’s industrial output rose 6.5% on a year-over-year basis in April of 2017—compared to a 7.6% gain in March 2017. April’s output remained below the market consensus of 7.1%. Output expanded at a slower pace.

  • Manufacturing rose 6.9%—compared to 8% the previous month.
  • Electricity, gas, and water production rose 7.8%—as compared to 9.7% the previous month.
  • Mining production fell -0.4%—compared to -0.8% the previous month.

Impact of lower industrial production

Industrial production provides the current state of economic activity and its future course to some extent. Low industrial numbers imply that the struggles faced by the Chinese economy are due to lower demand. The slowdown in the Chinese economy will likely impact the whole world (ACWI) (VEU) (VTI). China is one of the largest trading partners for other economies. It’s also among the top four manufacturing industries in the world including the US (SPY), Japan (EWJ), and Germany (EWG).

Investment impact

Any slowdown in China’s manufacturing sector is expected to impact manufacturing sector ETFs including the China A-shares ETF. The China A-shares ETF tracks mainland Chinese stocks traded in Shanghai. It has posted a 2% fall in 2Q17 as of May 17, 2017. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) fell 1%, the KraneShares Bosera MSCI China A ETF (KBA) fell 2%, and the Market Vectors ChinaAMC A-Share ETF (PEK) fell 1% in 1Q17.

In the next part, we’ll look at China’s increasing debt. Its debt poses a threat to global markets.

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