The State of China's Economy
By Anthony Lawry
As has been the case over the last number of months, economic data coming out of China indicates that the state of overall Chinese economy is mixed. Because of this, analysts looking at China's economic outlook and future of Chinese growth are uncertain at its most benign characterization. While recent data suggested that factory output prices increased in the month of September for the first time in five years, a negative Chinese trade report for the same month negatively shocked equity markets in Europe and the United States.
In an incredibly negative turn of events, exports for the month of September decreased by a large 10% compared to last year's September export figures and imports also unexpectedly fell, thus questioning whether or not domestic consumption demand was maintaining high levels of growth which the country enjoyed in August of this year. In spite of this negative monthly data, China's economy, nonetheless, has shown indications of a lukewarm stabilization, yet analysts still question if this is the so-called 'soft-landing' economists and business leaders are hoping for. That is to say, the data has yet to confirm whether or not China's economy will continue to incrementally slow or if a hard crash is yet to metastasize.
Regardless, the large degree of stimulus or capital injection into the economy has eased the minds of investors and officials alike. Billions of dollars have been flowing into markets, really, for the past eight years in what is largely viewed to be the continuation of China's capital lifeline. In mid-October, the People's Bank of China injected nearly $32 billion into open-market operations. To a large degree, these policies have been an extraordinary success for the continuation of unprecedented levels of growth in spite of the worst global recession since the Great Depression, the 2008 Financial Crisis. Nonetheless, questions arise as to whether or not capital injections will continue as Chinese state-owned enterprises have accumulated around $18 trillion in debt. While this debt-fueled growth is truly a global trend since the 1970s and has been the ending of the gold-backed US dollar, this provincial, corporate and national debt still has many investors worried. Nonetheless, Chinese firms and central authorities have eased markets with much talk of deleveraging these large levels of debt.
Other less looked at economic data has also been somewhat of a cause for concern. 10-year bond yields declined to a 12-year low falling by nearly 2.64%. This is the lowest level of 10-year bond yields since Bloomberg began collecting data on Chinese bonds in 2006. Any rudimentary macroeconomic textbook would suggest one indicator of recession is the flattening of what is called the yield curve. Rather, times of economic prosperity are more evident when short-term yields (one to two year maturities) are low and long-term yields (ten year maturities and longer) are high. The flattening of this curve or when long-term yields decrease while short-term yields increase is typically an indication of an economic slowdown. It is when the curve is inverse (short-term yields high with long-term yields low) that an economy is facing a recession or even a depression. While a number of relatively healthy economies, like the United States, have been facing flattening yield curves, it should still be considered a cause for concern.
Again though, nefarious signs can be overshadowed by positive ones. A Reuters' poll of 58 economists concluded that China's GDP rose to 6.7% in the third quarter of 2016, a similar growth level to that of the first and second quarter. These same economists suggested that China will be able to meet its GDP growth targets for the rest of the year and may do so for 2017 as well. In spite of this, figures that make up GDP growth have counterintuitively slowed over the past month including freight volume, passenger traffic, and the number of floors under construction. While calculating these figures into actual growth can be tedious, they also tend to be more accurate of the overall economic picture than mere GDP numbers. Furthermore, these figures are used to correlate directly with GDP figures, but diverged from GDP figures around 2012 according to Capital Economics.
Regardless, this space will be tracking both figures closely over the next month. Overall, gauging the degree to which China is growing or if China is actually not growing at all can be a complicated and dizzying spectacle. There is little doubt that the Chinese economy has hit a few bumps in the road over the past few years and forecasting any country's economic outlook is becoming even more difficult in a global economic environment defined by uncertainty and in turn volatility. There are a number of pieces that need to fall into place in the upcoming months for China to continue the moderate levels of success they have been enjoying over the past few months. As of now, it is almost up to the viewers and their level of pessimism or optimism as to whether or not China's economy is headed towards more economic calamity or if the economy has finally been corrected and is careening towards stabilization or healthy economic growth.
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