How is China doing?

From Fathom Consulting, here is the latest, based in part on momentum indicators:

Contrary to the picture painted by the official statistics, we believe that China’s economic growth rate has more than halved since the beginning of early last year, from just over 6% to less than 3%. Indeed, our preferred measure of economic activity — our China Momentum Indicator (CMI) — slipped 0.2 percentage points to 2.8% in September.

Looking at the individual components of our CMI, rail freight volumes reached a six-and-a-half year low, while electricity production also fell — down 3.1% in the twelve-months to September. The third and final component, growth in bank lending, has been broadly stable at around 15% per annum over the past four years.

In response, the PBoC has eased policy on no fewer than six occasions in the past twelve months. We see further substantial cuts in China’s policy rates of interest over the next year, not least because in real terms they remain stubbornly high.

As benchmark interest rates continue to fall in China, capital outflows are likely to rise, putting further downward pressure on the currency. Back in August, the RMB was allowed to fall by 3.0% against the USD in the space of a week – the biggest one-week move in 20 years.
Last Friday’s appreciation aside, we view further devaluations as more or less inevitable. Accordingly, we see the RMB falling at a pace of 2.0% to 3.0% a quarter over the next two years as China attempts to export some of its pain.

In my admittedly biased view, signs of “good news” coming from China, especially on the asset price side, are often bad news.  They are signs that the government is not allowing markets to adjust, or does not feel politically strong enough to get certain transitions over with.  Here is the FT on what is keeping the Chinese economy going at whatever growth rate it may be at:

Beijing has ramped up fiscal spending to fill the gap. Fixed-asset investment by local governments rose 10.6 per cent in the year to October.

Be careful what you wish for of course.

A key question in reading a lot of China indicators is how to think about changing prices.  Imports are plunging in value terms, in part because the prices of commodities are falling, but imports in pure volume terms are rising.  Which matters more?  We usually count the value figure. and besides, some of those prices are falling because Chinese demand began to decline at the older prices.  Measuring the value of the imports will make you much more pessimistic than merely considering the volume.


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