China Growth – The Mirage by 720Global

In our latest article, “China Growth – Miracle or Mirage” published October 20, 2015, we questioned whether China’s perfectly forecasted and uniquely steady economic growth is a mirage. On Friday morning, following Chinese Premiere Li’s comment that growth was still in a “reasonable range”, China’s central bank (PBoC) proceeded to cut interest rates as well as the required deposit reserve ratio for major banks. The language of the Premier and the actions of the PBoC are contradictory. Their actions in conjunction with their words offer even more evidence to believe reported growth is a mirage and the correct answer to the question.

This postscript offers a series of facts and recent economic data to lend further context toward determining whether China’s growth is, in fact, a miracle or a mirage. Before viewing the statistics below take a moment to consider the following: If China’s economy is in fact humming along at a “reasonable” 6.9% pace, then what is the logic and motivation behind aggressively easier monetary policy? Put another way, what don’t we know about the Chinese economy?

Central Bank Actions

  • 1yr Benchmark Lending Rate: Since November 2014 China has cut their 1 year interest rate 6 times. Over this period the rate has been lowered from 5.60% to 4.35%
  • Required Deposit Reserve Ratio for Major Banks (determines amount of leverage banks can take and therefore the amount of loans they can make): Since February 2015 China has lowered it 4 times from 19.50% to 17.50%.
  • Renminbi: Since August China devalued their currency 2.8%

Economic Statistics

  • China export trade: ?8.8% year to date
  • China import trade: ?17.6% year to date
  • China imports from Australia: ?27.3% year over year
  • Industrial output crude steel: ?3% year to date
  • Cement output: ?3.2% year over year
  • Industrial output electricity: ?3.1% year over year
  • China Manufacturing Purchasing Managers Index: 49.8 (below 50 is contractionary)
  • China Services Purchasing Managers Index: 50.5 (below 50 is contractionary)
  • Railway freight volume: ?17.34% year over year
  • Electricity total energy consumption: ?.20% year over year
  • Consumer price index (CPI): +1.6% year over year
  • Producer price index (PPI): ?5.9% year over year
  • China hot rolled steel price index: ?35.5% year to date
  • Fixed asset investment: +10.3% (averaged +23% 2009?2014)
  • Retail sales: +10.9% the slowest growth in 11 years
  • Shanghai Stock Exchange Composite Index: ?30% since June

Are these actions and statistics consistent with a country thought to be growing at 6.90% annually?

China


 

About 720 Global

720 Global is an investment consultant, specializing in macroeconomic research, valuations, asset allocation, and risk management. Our objective is to provide professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and marketing. We assist our clients in differentiating themselves from the crowd with a focus on value, performance and a clear, lucid assessment of global market and economic dynamics.