China Going Boom

By Jeffrey Snider

For a very long time, they tried it “our” way. It isn’t working out so well for them any longer, so in one sense you can’t blame them for seeking answers elsewhere. It was a good run while it lasted.

The big problem is that what “it” was wasn’t ever our way. Not really. The Chinese for decades followed not a free market paradigm but an orthodox Economics one. This is no trivial difference, as the latter is far more easily accomplished in a place like China. Economists do love their Keynes, a doctrine that falls on a different part of the same spectrum as Communism.

At the 17th Communist Party Congress way back in 2007, the idea of the “harmonious society” was in trying to strike some balance between growth and living with growth. Rapacious transformation had uglied for a great many the simple basics of human life. The Chinese understandably did not want to give up the economy for it, however.

In seeking that balance, the 17th Party Congress altered slightly Chinese communism. Party officials there going back to Mao had always sought to make sure of their distinct version of political, social, and economic doctrine. Communism in China wasn’t Communism in Russia and the Soviet Union, though you’d be forgiven for mistaking the vast similarities.

For a very long time, starting in the eighties and early nineties, there was an embrace of markets as if that would define China’s ideological difference. After the massacre at Tiananmen Square, as well as the fall of Soviet Russia, a more Western embrace seemed almost easy by comparison. That included total dollarization in money as well as economy. China opened a bit, and the “dollars” flowed in.

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China Property Outlook

By Callum Thomas

This week the “Chart of the Week” is focused on the outlook for China’s property market.  The Chinese property market is perhaps one of the most important markets in the world, if not the most.  What happens to this market has direct flow-on effects to global commodity prices, emerging markets and commodity producers, and considerable influence on the cyclical macroeconomic and risk backdrop domestically.

The chart comes from a report on the outlook for China’s economy (and the impact on the balance of risk vs opportunity for Copper prices).  Basically the chart shows the average year-on-year price change across the largest 70-cities in China against our leading indicator.  The key conclusion being that the Chinese property market is about to head into a slowdown.

The leading indicator incorporates interbank market interest rates, government bond yields, money supply growth, and property stock relative performance.  Historically these factors have proven to offer a good lead on the outlook (and have helped me call tops and bottoms in this very cyclical market!), and the economic logic behind these factors is sound e.g. interest rates have a direct impact on financing costs.

In terms of the implications, it really depends on whether the outcome is a slowdown or a downturn.  Given the lead-indicator has stabilized there is some hope that it will be just a slowdown (a downturn would be where property prices go into contraction, leading the property sector into recession).  However the impact of a slowdown will still be felt across global markets, as it will impact on construction and raise downside risks for commodities.

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China PMI and Copper

By Callum Thomas

With the end of February, China puts itself in the spotlight with the first major PMI results of all the major economies, and major economy is the key word as China’s influence across global markets only grows by the year.  The February manufacturing PMI came in at 50.3 (51.2 expected, 51.3 previous), and the Non-manufacturing PMI at 54.4 (55.0 expected, 55.3 previous).  So, some pretty soft results.  The timing of Chinese new year no doubt played some role (taking place in the middle of February – and hence shutting things down for a couple of weeks around the 1-week national holiday), so we’d need to see March data to confirm, but it still a weak result nonetheless.

On the details, within the manufacturing PMI large firms were down -0.4pts to 52.2 vs small firms down a sharp -3.7pts to 44.8 – highlighting the pressure facing smaller firms which receive less support from the government and are generally more sensitive to changes in economic activity.  Within the non-manufacturing PMI, the Services PMI was down -0.6pts to 53.8, while the Construction PMI was down -3.0pts to 57.5 – which lines up with the slowing in property price gains.  So overall, within the data there was not much to get excited about.  And looking at a key China-sensitive market, the outlook for copper prices is left with some looming questions…

The key takeaways from the February China PMIs are:

-The February China PMI data was materially weaker vs January and consensus expectations.  Chinese New Year likely had some impact, but it was still a weak result.

-The soft data, even if it proves to be temporary, leaves question marks looming on the outlook for copper prices.

-Looking at the copper and government bond markets there are a couple of key divergences, which highlight double-edged risks in copper prices and bond yields.

1. China Manufacturing PMI: This chart shows the breadth of the components that make up the NBS China manufacturing PMI.  You can clearly visualize the moment China stepped up stimulus measures in early 2016, while the rebound in global trade and commodities and weakening CNY also helped. Whereas now you can see the impact of waning stimulus tailwinds (which were already in play) and with the latest results accentuated to the downside by Chinese new year distortions.

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