China’s economy has been through a period of structural slowing, which up until early this year was accentuated by cyclical slowing. A series of stimulus efforts have helped improve the cyclical situation and push against some of the structural headwinds. This has resulted in a period of economic stability for China. The data released over the past week for August confirm this narrative, and the charts below illustrate some of the key trends and areas to watch for China’s macro-economy.
1. The OECD Composite Leading Economic Indicator for China has undergone a clear turnaround from the worst level since the 08-09 global financial crisis.
2. The PMIs for China have all gone above 50 (for the first time since 2014), marking a turnaround from the low point earlier this year.
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(via Tom Orlik)
3. A key reason behind the turnaround in China’s economic data is the large scale monetary policy *and* fiscal policy easing that China has conducted over the past year; this is dramatically evident in the graph below which shows the benchmark interest rate and the budget deficit.
4. Another view on monetary stimulus is the massive amount of funding that has been pumped into the banking system by the People’s Bank of China.
(via Chris Balding)
5. The impact is clear in this chart of private investment vs government investment – private investment has crashed, while state driven investment is surging.
(via Simon Rabinovitch)
6. China also looks set to depart from producer price deflation, as the annual change in PPI improved to the highest (slowest pace of deflation) since 2012, and this has taken many by surprise as the chart of PPI actual vs expectations shows.
7. The housing market has also been a major area of note, with prices surging in a speculative mania in the largest cities, and housing sales accelerating. However with a big glut of supply this is translating into only a mild pickup in housing starts so far.
(via Alex Frangos)
8. But all of this has had only a mild impact on the consumer. While there has been a minor improvement in retail sales growth, the trend has been for slowing growth; perhaps the government needs to focus more of its stimulus efforts on the consumer instead of investment…
(via Jeroen Blokland)
So it should be pretty apparent that China has seen a clear turnaround in its macroeconomic cycle from quasi-recession levels (not technically recession since its GDP didn’t contract). It should also be clear that the economic recovery is primarily stimulus driven (large scale monetary easing through interest rate cuts and injecting funds into the banks, and a big expansion of fiscal deficit focused on investment).
So the question should then focus on the sustainability of the economic rebound, and whether or not the fiscal and monetary economic stimulus China has done will translate into some sort of virtuous cycle. The key is looking again at the structural headwinds and cyclical headwinds.
The previous cyclical headwinds for China were in the form of very weak export demand at a time when the Renminbi was appreciating — global trade demand remains weak, but the Chinese yuan has weakened notably. Another cyclical headwind was the slump in property prices in 2014 — since then a renewed property bubble has emerged. Another headwind was the anti-corruption campaign, which while ongoing, has reduced in intensity. So overall the cyclical headwinds have largely eased, but as the graph on private vs public investment shows, private investment has collapsed, and this surely reflects a lack of confidence but also reflects the structural headwinds.
China faces structural headwinds of large scale overbuilding of property (implying a lower pace of future property driven investment), overcapacity in manufacturing (less factories need to be built, so a lower pace of manufacturing investment), market share constraints (China has already become a major player in the global supply chain and is unlikely to see big gains in market share, if gains at all), and demographics are also becoming a headwind due to the adverse impact of the one-child policy (note, the one-child policy has been eased to 2 children, but the impact of this will be a long way off).
So China’s structural economic headwinds remain in force, and are largely “baked in”. There is some room to move around structural headwinds however, and when an economy faces both structural and cyclical headwinds as China did in 2014-15, it is very prudent to offset the cyclical headwinds with counter-cyclical macroeconomic management tools as China has. But as much of the world is finding out, cyclical tools are a poor solution to structural challenges.
Bottom line: China has entered into a more benign economic patch as powerful monetary and fiscal stimulus have offset cyclical headwinds, but structural headwinds will limit the duration and magnitude of the rebound.