Pantheon Macroeconomics - Are there any signs of a Chinese recovery yet? Freya Beamish discusses

News | Question of the Week, WC 7th Oct
Are there any signs of a Chinese recovery yet? Freya Beamish discusses

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Question of the Week, WC 7th Oct

Q. Are there any signs of a Chinese recovery yet?

A. The headline activity data remain pretty dire, for now. Industrial production and real retail sales growth both slowed sharply quarter-on-quarter in Q3. Fixed asset investment has continued to slow, despite a nascent recovery in infrastructure, as the investment environment in the private sector remains sour amid PPI deflation, and the uncertainty of the trade war. The official manufacturing PMI remains in its downdraft, while the services sector is weighed down by deteriorating labour incomes and confidence, and will soon catch a cold from manufacturing

Some green shoot are visible, though.  The Caixin manufacturing PMI has trended up since the start of the year, albeit with a lot of volatility. Similarly, private sector profits appear to be recovering, though the headline remains burdened by the state-owned sector. PPI deflation also should soon trough, largely thanks to base effects generated by the tumble in oil prices in Q4 last year. These signs are positive. But we aren’t yet convinced that they are sustainable. Monetary conditions remain very tight, and the Caixin PMI, for instance, looks very exposed to a downward correction in this context. A trade truce would help as it could convince firms to start borrowing, helping the PBoC’s previous easing measures feed through. But even so, looser monetary conditions translate into faster GDP growth with around a three quarter lag. So we can’t hope to see an economy-wide recovery until well into next year. Even then, the rebound will be disappointing; the authorities have a tight bias, and China will be swimming against the global tide, with the U.S. facing a grinding slowdown.

Posted: 11th Oct 2019

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