Daily Insight – China data looks distorted

by: Maritza Cabezas , Georgette Boele

Global-Daily-Insight-11-March-2014.pdf ()
  • Investor sentiment takes a hit on the back of weak China export and credit data…
  • …but volatile numbers are typical at this time of the year, while there are additional special factors
  • We continue to expect the authorities to hit their growth target

A couple of weak reports out of China…

Key reports tracking the state of China’s economy over the weekend and on Monday came in below expectations. However, a number of heavy distorting elements appear to be at play, which suggest we should not place too much weight on these economic reports at this stage. February’s export growth surprised on the downside, recording the sharpest contraction since August 2009 (-18.1% yoy was 10.6% yoy the previous month). Meanwhile, total social financing (TSF) a broad measure of credit in China fell significantly to RMB 938.7bn in February from RMB 2584.5bn in January, largely due to a substantial decline in credit from the shadow banking sector, which fell to RMB 17.2bn from RMB 993.4bn in January.

 …but special factors appear to be at play

A number of special factors look to be influencing these reports. First of all, some of the volatility in the data is typical in the first months of the year because of the Chinese New Year. In addition, the trade data may also have been affected by weaker external demand because bad weather conditions in the US and some correction in the over reporting of export data to Asia in response to the recent depreciation of the CNY, which started in mid-February. Exports to the US fell to -11.3% from 10.7% the previous month, while those to Hong Kong also plummeted (-24.3% yoy). As for imports to China, they remain strong and are not really consistent with a slowdown in domestic demand, giving more force to the view that distortions are present in these reports. Granted there is more fundamental factors at play in the lending numbers, given China has a high corporate debt/GDP ratio of around 170% and the authorities’ are clearly aiming to slow investment and contain credit. Nevertheless, all the signals are that the aim of policy is to do this in a controlled manner that the economy can absorb, while still maintaining decent growth rates.

We expect the official growth target to be met this year

Our view is that in the coming months credit growth will remain moderate. Indeed during the National People’s Congress, the Chinese authorities called for a “balanced” monetary policy, which should support a somewhat stronger credit growth compared to the past year, when “prudent” monetary policy was the norm. The authorities have also mentioned that shadow banking is part of a sound financial system and have emphasised that their objective is to curtail risks and not to crackdown on shadow banking. This is consistent with the official GDP growth target announced last week by China’s authorities of 7.5% and in line with our GDP growth forecast for 2014.

China data undermine investor sentiment

The lower than expected Chinese data had ripple effects in financial markets on Monday, as investor concern of a sharper than expected slowdown in the country once again flared up. As a result, equity markets dropped by on average between 0.5 and 1.0%. Moreover, copper, zinc, iron ore, palladium and oil prices moved lower as well. Currencies with a large sensitivity to China because of their commodity exports, such as the Australian dollar, saw relatively large declines. Furthermore, Asian currencies were generally weak. Although sentiment clearly took a turn for the worse, we did not see signs of major risk aversion. The Japanese yen did not strengthen (perhaps also held back by some weak macro data out of Japan), which is usually a sign of significant investor gloom. Moreover, US Treasury yields did not drop. Both moves would usually be present in a risk aversion wave. However, the equity volatility index (VIX) moved higher on Monday, though it is still at a very low level. Going forward, we expect Chinese data to point to a stabilising – rather than sharply slowing – growth momentum, which should lead to some unwinding of investor worries, though the focus on China risks is unlikely to disappear given the level of credit and the reform process.