Why China’s recent slowdown may be more pronounced than investors realise

The rise of China has been astonishing and its growing influence on the world is one of the economic forces discussed in our inescapable investment truths for the decade ahead. But economies don’t grow in a straight line. China is facing a transition period. It is a country we monitor closely and we believe its economy is currently doing worse than the official GDP data suggests.

We have constructed our own China activity indicator and find it exhibits far greater cyclicality than official GDP figures (see chart below). Our indicator includes monthly data on trade, retail sales, industrial production and investment in physical assets (such as machinery).

It captures the widely reported slowdown of 2014-15 that was largely absent from official GDP and the subsequent stimulus-led upswing in 2017. More recently, it has pointed to a renewed slowdown beginning in April 2018. Most importantly, this recent slowdown pre-dates the trade war with the US.

China's economy has slowed dramatically over the last year

Schroders China activity indicator

Source: Thomson DataStream, Schroders Economics Group. 29 January 2019.

Naturally this slower growth has prompted speculation that the Chinese authorities will take steps to stimulate the economy. This would have knock-on effects, with memories of 2009 raising hopes that such stimulus could also boost prices of industrial commodities. If history repeats itself, and China engages in massive credit and infrastructure stimulus, then prices could get a huge boost from the world's largest commodities consumer and any worries about price deflation could go away.

We do not see this happening. China looks increasingly constrained on both the fiscal and monetary policy fronts by a mix of high local government debt and concerns over financial stability and the currency.

We continue to see the main form of stimulus in China coming via central government tax cuts, rather than stimulus that might support demand for infrastructure or property. We therefore think it is highly unlikely that China will ride to the rescue of commodity prices, or global trade, on this occasion.

We will be updating our forecast for Chinese GDP soon, but a continued growth slowdown in Q1 and potentially also Q2 seems likely. Current stimulus efforts look too timid to drive a strong rebound in growth, though they may deliver stability in the second half of the year.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Let's block ads! (Why?)