The latest round of PMI data showed a starkly divergent outlook for China vs the rest of the world. While the Chinese manufacturing sector seems to be losing momentum, the rest of the world appears to be stronger than ever.
There are a few important, slightly non-obvious, points to highlight about this chart. Also, as you might guess there are a few key implications…
First, a quick couple of thoughts on the why. Last year we saw a historic global stimulus effort to combat the economic threats posed by the pandemic… that is except for China. China undertook a short sharp lockdown to get case counts under control, and reopened domestically much faster than the rest of the world. This along with a desire not to repeat what are seen as the mistakes of the past (excessive stimulus), meant the stimulus efforts in China were relatively conservative.
So this previous policy divergence was a key driver. Another aspect is that the rest of the world generally saw a deeper collapse in economic activity as the global economy shut down over night. So the bounce-back from reopening was always going to be more significant for the rest of the world too.
This is where we get onto the implications: one immediate reaction to this chart might be that the apparent slowing of China’s economy could end up dragging the rest of the world down. Indeed, this has become a common theory among strategists recently as the China credit impulse moved into contractionary territory.
But I think it’s important to highlight the still substantial stimulus tailwinds in force throughout the global economy. There is also the ongoing reopening process across the rest of the world, and a prospective second wave of the recovery (consumer relief euphoria and a capex/investment boom).
So it very much is a different environment from that of the past decade where that type of thinking worked like clockwork. But that doesn’t mean we shouldn’t pay attention to divergences, indeed as noted last week: there are several divergences across the macro/market backdrop that are driving a shift in the risk outlook.
The other open question is what will China do next? Indeed, we might see another policy divergence occur as the rest of the world edges towards tightening; we could well see China pivot back to easing to short-circuit this tapering off of momentum.
Bottom Line: The divergence between China and the rest of the world has been driven by previous policy divergence; and ironically might be foreshadowing an impending further divergence in policy.
NOTE: this post first appeared on our new Chart Storm Substack: https://topdowncharts.substack.com/
Head of Research and Founder of Topdown Charts
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