Asia/Pacific September 02, 2019 / 10:08 am UTC

China Tracker: Continued Growth Weakness

By Jeff Ng

Bottom line: Our proprietary China tracker shows continued weakness in economic growth. Given the sluggish momentum in July and August, it is likely that GDP growth slowed further in Q3, relative to Q2. The impact of the U.S./China trade war is likely to bite the hardest from September 2019 to June 2020, in our view. We see an increasing likelihood that the government will allow GDP growth to slow to around 6% in the coming quarters, and some stimulus will likely be implemented to prevent a further hard landing. 

Figure 1: China Tracker vs. GDP Growth

Source: CEIC, Continuum Economics

China’s weak economic figures in July meant that our China Tracker (methodology in a previous publication) saw further deterioration in July-August. In July, our China tracker is at -1.15 (measured in standard deviations from trend), from -0.57 in June. The major swing factor is loan growth, which slowed in July despite official liquidity support. Electricity growth and “new economy” retail sales have also moderated. The only sub-index that was positive is property, albeit moderating for four consecutive months already.

China’s PMI figures for August showed continually muted momentum in the economy. Manufacturing PMI was just 49.5 compared to 49.7 a month ago. Examining its components, new orders (domestic and exports), employment, imports, output prices and inventories were the main drags to the sector. Still, we saw some improvements in new orders (domestic and exports). Purchase quantity and input prices turned positive. The outlook for medium enterprises was the worst, although large enterprises returned to marginal positive territory.

A rebound to positive territory for Caixin manufacturing PMI means that the private sector may have seen some improvements in August, albeit from a weak position.

Non-manufacturing PMI slightly improved to 53.8 in August from 53.7 in July. Selling prices (expansionary) and employment (contractionary) improved compared to July. Still, the positivity in new orders faded. 

Figure 2: China Tracker (green=positive, red=negative)


20182019

JanFebMarAprMayJunJulAugSepOctNovDecJanFebMarAprMayJunJulAug
NERS



















NERS
PPTY



















PPTY
EMPP



















EMPP
SVSP



















SVSP
RAFR



















RAFR
ELEC



















ELEC
LOAN



















LOAN
CNT



















CNT

Source: Continuum Economics. Note: CNT refers to China tracker, shades determined in standard deviations away from three-year averages. NERS refers to “new economy” retail sales (e.g., information and communications); PPTY: property prices; EMPP: manufacturing employment PMI; SVSP: non-manufacturing PMI; RAFR: rail freight; ELEC: electricity output; LOAN: loan growth. 

Our Forecasts for August

We expect August data to confirm that Q3 growth will be slower than Q2. This is despite expected pickups (slight) in industrial production and retail sales compared to a month ago. Still, fixed asset investment growth should remain stable in the absence of a significant stimulus to the economy. Trade figures are likely to show the divergence between slightly-positive external demand and negative domestic demand. Meanwhile, we see little prospect for a change in price trends. Inflation likely remains elevated from food, but producer prices likely remain relatively depressed, posing continued challenges to the economy. We also see chances that money supply growth and loan growth will accelerate, as authorities provide a slightly accommodative stance. 

Figure 3: China Forecasts (August)


AugustJuly
Foreign Reserves (USD bn)3,1003,104
Aggregate Financing (CNY bn)1,7001,011
New Yuan Loans (CNY bn)1,1501,060
Money Supply M2 (% y/y)7.98.1
CPI (% y/y)2.72.8
PPI (% y/y)-0.5-0.3
Exports (% y/y)2.63.3
Imports (% y/y)-2.8-5.3
Trade Balance (USD bn)37.3044.61
Industrial Production (% y/y)5.14.8
Retail Sales (% y/y)7.97.6
Fixed Asset Investment (% y/y YTD)5.75.7

Source: Continuum Economics

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Analyst Certification
I, Jeff Ng, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.