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    China’s Economic Growth: How is China’s Economy Doing?

    Jan van Eck ,CEO
    July 31, 2019

    Watch Video How is China's Economy Doing?

    CEO Jan van Eck and Economist Natalia Gurushina discuss the state of China’s economy and highlight two key charts for understanding where it is in its growth cycle.

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    China has been a major contributor to global growth, and its economic activity tends to have significant repercussions for the global economy. To understand where the Chinese economy is in its growth cycle, the two charts below are perhaps the only charts one needs.

    Chinese Economy Health Check: PMIs
    China PMI

    Source: Bloomberg. Data as of July 31, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    Purchasing managers’ indices (PMIs)are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, the manufacturing PMI is the number to watch for cyclicality. Through the end of July, the non-manufacturing PMI shows a strong rate of expansion, which one would expect with the emergence of the “new China” economy—one that is increasingly driven by consumption. However, the manufacturing PMI shows several recent dips below the important 50 mark into contraction territory, corresponding to the “recession” in late 2018, followed by a recovery after Q1 2019. It saw another fall into contraction territory in Q2 2019, though this was slightly smaller than the Q4 2018 drop. Though still in contraction, a marginal improvement was seen in July, driven by state-owned companies. It appears the private sector remained under pressure.

    Understanding the Credit Cycle: Non-SOE Borrowing Costs
    Borrowing Costs

    Source: UBS. Data as of July 29, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Spreads are measured relative to average yield of 1, 3, 5, and 10 year bonds issued by the China Development Bank.

    As with any economy, central bank policy is very important in China. In this chart, we can see that interest rates for the private sector fluctuate, whereas the interest rates paid by state-owned enterprises (SOEs) are pretty stable. Therefore, to understand the credit cycle, we point your attention to this private sector, or non-SOE, interest rate. It spiked in 2018, as a result of China’s crackdown on shadow banking2, meaning tougher lending conditions for the private sector. These interest rates began trending down in the winter of 2018 as the “drip stimulus” appeared to take effect, but seem to be starting to grind higher again—despite the People's Bank of China's push for bank branches to lend more. Combined with the persistent weakness of small companies' PMI, this is a source of concern in our view, and we believe it calls for meaningful and innovative structural changes going forward.

    For more insights on China, please see VanEck’s outlook for China in 2019.


    1Purchasing managers index (PMI) is an economic indicator derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction.

    2Shadow banking comprises private credit intermediation occurring outside the formal banking system.

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