China - Growth Slump Is Over?
November 30, 2021
Read Time 2 MIN
China’s activity gauges signal that the near-term growth outlook remains problematic. The government has plenty of fiscal space to address the issue – will it use it or ideology will dictate otherwise?
China’s headline activity gauges (PMIs1) moved back to expansion territory in November, adding weight to an argument that the growth momentum is stabilizing after being hit by a rather long list of adverse factors, including tighter regulations, the real estate crunch, energy rationing, supply chain disruptions, higher commodity prices, and the zero-COVID approach. Targeted policies helped for sure. First, authorities rolled back some real estate restrictions, called on property developers to honor their debt obligations, and urged banks to maintain a “stable and orderly” flow of credit to the sector. Second, there was a concerted effort to ease commodity price pressures and power rationing. Third, the government extended support for small and medium-size companies, cutting some taxes and fees, assisting with cloud/digital services, lowering power tariffs (via local governments), and asking for more funding from banks.
Even though the headline PMIs beat expectations, weaknesses are abound. The manufacturing PMI was barely above the expansion/contraction threshold (50.1). The services PMI was a touch lower than a month ago (52.3). Gauges for services that are sensitive to the movement restrictions (and COVID outbreaks) moved deeper into contraction zone. The new orders sub-index remained in contraction territory, as did the small companies PMI. China’s growth outlook for the next several quarters is now noticeably weaker than was expected just a few months ago (see chart below), and today’s release signals that the risks are still to the downside – especially with such formidable headwinds as the omicron outbreak and the cooling real estate sector.
Would this justify stepping up policy support? Until now, the central bank kept its “bazooka” locked in a safe, with key rates and reserve requirements for banks unchanged. However, the latest communications contained a reference to “quasi-stagflation”, while the monetary policy report no longer mentioned the need to control “the valve on money supply”. The next batch of money and credit aggregates (in about 10 days) will show whether this is indeed the case. So, stay tuned!
Chart at a Glance: Consensus Sees China’s Growth Slump Lasting Until Q322
Source: Bloomberg LP
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.