The July activity data for China were just released, but rather than dwell on the details of the data, I decided I would pick out 5 charts that show some of the key cyclical and structural trends for China's economy. It's important to keep track of these given the rising influence of the Chinese economy on the global economy and financial markets. It's also important to gauge any changes in the cycle, as this has the greatest near term impact on investment markets and helps us understand the risk and opportunity set and finesse the timing around molding and shaping portfolios to capture and reflect these trends.
1. The July activity data (industrial production, retail sales, and fixed asset investment) were all broadly weaker, coming in worse than expected and worse than the June growth rates. Yet the trend remains for a sort of prolonged stabilization after slowing from the credit-fueled boom times.
2. A key element, fixed asset investment continues to slow again as private fixed asset investment remains weak, and the state driven investment stimulus push has started to taper off.
3. This lines up with the fiscal picture; the budget deficit remains at record lows and has not expanded - which would be consistent with additional stimulus. But the current settings of fiscal and monetary policy have helped stabilize growth and are yet to move towards tightening.
4. The weakening currency (at least up until the last 2 months) has been good for exports and you can see a clear turnaround in dollar exports and rail freight volumes. Yet again, this is a trend that will probably have a finite life if it is purely currency driven.
5. The state driven investment push, fiscal and monetary stimulus, and weaker currency have teamed up tp help stabilize the data, and for now have set a cyclical upturn in progress. As the OECD composite leading economic indicator below shows, Chinese economic growth is likely to hold up at least through the end of the year. Next year however a number of these short-term positive trends will start to turn, and 2018 could be a challenging year for the Chinese economy. For now it's growth/inflation/commodity positive.
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