9 Nov

Why China’s Slowdown Indicators Are Confusing

WRITTEN BY Mohit Oberoi, CFA

China’s slowdown has worsened since the US-China trade war erupted last year. The producer price inflation data released today showed a worsening slowdown. Meanwhile, this month China’s economic indicators portray a mixed picture of the world’s second-largest economy. While some indicators show that the slowdown is worsening, other indicators show that things aren’t as bad as the outside world thinks they are. Let’s drill down further.

China’s slowdown

China’s slowdown has been amongst the major risks for global markets. To be sure, it’s a structural slowdown as the Chinese economy cannot grow in double digits or even high single digits looking at its current size. However, the natural pace of China’s slowdown was further aggravated amid the US-China trade war. Uncertainty over US-China trade relations and an overall global slowdown has further amplified China’s slowdown.

Meanwhile, economic data released this month portrays a mixed picture of the Chinese economy. While some indicators reflect that the economy might be bottoming out, others reflect a worsening slowdown. Let’s try and decode this confusion in this article.

China’s PMI

Like for most countries, we get two versions of China’s PMI. One is, of course, the official version and the second is the private Caixin/Markit survey. In October, we saw a divergence between these two versions. The Caixin/Markit survey showed continued expansion and the reading rose to 51.7, the highest since February 2017. However, the official manufacturing PMI slipped to 49.3 in October as compared to 49.8 in September.

Interestingly, while the Caixin/Markit survey showed improvement and continued expansion, the official PMI showed that China’s slowdown worsened in October. Here it is worth noting that the two versions tend to diverge at times. While the official PMI is mostly based on large state-owned enterprises, the Caixin/Markit survey focusses on small and medium private enterprises.

October trade data improved, but vehicle sales slumped

Given the economy’s reliance on exports, the trade data is a crucial indicator to track. China’s October trade data was better than expected. Both exports and imports fell less than expected and showed improvement from September. On that note, China’s imports have been weak this year, falling in nine of the ten months. Sagging imports point to China’s domestic slowdown. On the exports front, the US-China trade war hit China’s exports to the US.

China’s vehicle sales crumbled this year. However, in October, while vehicle sales fell 5.7% year-over-year they rose, compared to September. Furthermore, the pace of decline narrowed in October. There is a general consensus that China’s automotive sales might be bottoming out. So, next year, we could see some positive momentum.

On that note, China’s electric vehicle sales fell sharply in the last three months after the Chinese government lowered subsidies. Falling electric vehicle sales in China are negative for companies like Tesla Inc. (TSLA) and NIO Inc.(NIO).

PPI reflects a worsening slowdown and negative outlook

Today, China released its October PPI (producer price index). The metric fell 1.6% in October, which happens to be the worst reading since July 2016. China’s PPI has been negative for four consecutive months now. Falling PPI reflects a worsening slowdown in China. Also, it’s worth noting that China’s PPI has been subdued in China amid tepid demand. Metal prices have been weak on weak end-user demand.

In my view, China’s slowdown is still a potent risk for global markets. While a US-China trade deal would hep lift sentiments, it’s not a magic pill that would fully address China’s slowdown. As noted previously, US companies continue to explore options beyond China. However, it would be a gradual exercise. That said, a complete breakdown in US-China trade talks or a massive escalation might expedite the exodus of US companies like Apple (AAPL) and Amazon (AMZN) that use China as a sourcing hub.

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