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By HaleStewart March 13, 2014 1:43 pm
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Should We Worry About the Latest Chinese Data?

     Over the last month, the economic news from China has been a bit disconcerting.  Both of the HSBC surveys have printed in the negative numbers, exports have been off, and now retail sales and industrial production nunbers have disappointed.  Let's look at these numbers in more detail to better understand their economic ramifications.

     Remember that China is attempting to change the composition of its economic growth from an export dependant model to one more evenly balanced between exports and consumer spending.  This means that at some time we should begin to see a change in growth numbers and the compositon thereof.

     Let's start with the manufacturing:

The HSBC manufacturing number printed a 48.5 in its latest reading, 1.5 below the 50 level that separates expansions from contractions.  The output and new orders sub-components also printed below 50, indicating underlying weakness.  At the same time, this index dropped during the first half of 2013 as well, after which it rebounded.  Finally, the reading is currently just negative, although the overall recent trend is clearly a decline.

    Like the manufacturing number, the services index has also dropped below 50, printing at 49.8.  But this number is just barely negative as well.  While we should take note, the negativie reading could just as easily be statistical noise at this point.

     The recent drop of 18.1% in exports caught the economic world off-guard.  Bloomberg noted this was the sharpest drop since the financial crisis.  However, this is most likely a one-off numbers.  As Dr. Ed Yardini noted:  "The 24% free-fall in China’s exports during February to the lowest reading since February 2012 was so bad that it makes no sense. Although the data are seasonally adjusted, the Lunar New Year holiday most likely distorted the month’s data. Comparable, though less severe, declines occurred during February in both 2011 and 2012."  And the Bloomberg noted, "Even so, the drop in exports isn’t as bad as it appears when taking into account the holiday, the inflated base of last year’s numbers, and a weather-related “soft patch” in the U.S. economy, said Ding, whose forecast of an 8.5 percent decline in sales was closest to the customs figure."

     And today we learned the Y/O/Y percentage change in industrial production was 8.6% and the Y/O/Y percentage change in retail sales was 11.8%; both numbers missed expectations by a pretty wide margin.  Analysts at Societe Generale attributed the fall in retail sales to “anti-corruption drive and disinflation” while pinning the slowing of industrial production on rising inventories, according to MarketWatch.

     So -- what do we make of this weakness?  Part of it is probably due to the seasonal impact of Chinese New Year's celebration.  For the last three years, early year Chinese data has had similar misses but later rebouned.  At the same time, many people have noted that as China tries to rebalance its economy, these type of misses may become more pronounced and numerous.  But also note China is still growing at a sharp clip.  And even if we see the number dip to the 6% range that's hardly a reason to throw in the towel.  While it would be disappointing, it would also be a signal the Chinese economy is beginning to mature and achieve first world status.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

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