China has long been the marginal driver of demand for a wide array of commodities. In an attempt to understand the recent rise in the price of industrial metals, the strength of Chinese demand is a key factor. The picture is mixed.
The chart and commentary below is taken from Sean Corrigan’s August newsletter – Cantillon Consulting – China: Is the tide turning?:-
Source: Cantillon Consulting
As Corrigan goes on to say:-
As the deceleration has progressed, the PMI has shown its expected downward response. In due course, company revenues – and ultimately profits – will follow if this is long maintained.
Greater recourse to receivables financing (funded partly by recourse to shadow finance) can delay full recognition of this awhile, but it cannot fail to impair either the magnitude or the quality of earnings as it works through the economy.
At the heart of the credit equation lies the Real Estate market:-
Source: Cantillon Consulting
During 2016 property prices in China increased by 19%, new homes by 12.4%, the fastest since 2011, but the market has cooled of late due to government intervention to subdue its speculative excess. New-home prices, excluding government-subsidized housing, gained from the previous month in 56 of 70 cities in July, compared with 60 in June. New Home Sales for August were the weakest in three years at +3.8%, however, investment in Real Estate development increased 7.8% last month – this is hardly a collapse. House prices are still forecast to rise by 6.8% in 2017 with growth driven by continued increases in second and third tier cities:-
Source: Bloomberg
There are concerns that the property market may crash later this year but Chinese authorities seem to be cognisant of this risk. They lifted restrictions on international bond sales in June, allowing cash strapped property developers to tap international markets. Bloomberg – Indebted China Developers Get Funding Relief as Bond Sales Soar – covers this story in greater detail.
With Real Estate contributing around 15% to GDP this more moderate pace of expansion is expected to temper the pace of growth for the second half of 2017. In Q2 GDP was estimated at 6.9%, the same level as Q1 – this puts nominal growth near to a five year high.
The tide appears to have turned; Industrial output, fixed investment, and retail sales all slowed during the summer. Industrial output rose 6% in August, the weakest this year. Retail sales rose 10.1% down from 10.4% and 11% in July and June. Fixed-asset investment in urban areas was up 7.8% in the year to August, the slowest since 1999:-
Source: Bloomberg
In a paper published at the end of August The Kansas City Federal Reserve – Has China’s Growth Reached a Turning Point? provide further support for expectations of a slowdown in Chinese growth. As they note, judging whether the recent rebound in China’s growth is temporary or more sustained, is a complex issue:-
The Chinese economy is undergoing a transition in which economic growth is rising in some sectors of the economy but declining in others. At the same time, China’s official quarterly GDP figures have been criticized for being overly smooth and less informative. Moreover, Chinese government policies have stimulated or cooled the economy at different times, further muddling the signal from economic data.
The authors construct a factor model but find that:-
…no single common factor explains the majority of the variation in Chinese activity. This is consistent with the view that the Chinese economy is in a transition, so different sectors are less synchronized. Indeed, our analysis shows that the five most important factors together account for about 75 percent of the total variation in the selected Chinese data.
The heat-map matrix – darker color = greater importance – is shown below (apologies for the poor resolution):-
