As China gets ready to overtake the United States as the world’s largest economy during the middle of the current decade, leaders have had to lead a tricky transition from a centrally-planned state to a free market. A major part of that task is to fill out the middle class that would support a consumption-based economy. But with base metal prices falling and the commodity currencies losing value in recent weeks, concerns over the Chinese growth picture have been stirred.
There’s one major caveat to Chinese data that is truly inapplicable to any other global economic force: you just don’t know if you can trust it. Chinese data seemingly comes out of a black box, where Chinese government readings of the economy tend to outpace private sector readings, or even eclipse foreign government estimates of economic activity.
One recent prominent example of this manipulation emerged in early-May when Chinese trade data showed an incongruent jump in exports despite declining orders to both Europe and the United States, China’s two largest markets. This discrepancy isn’t just our observation. According to researcher IHS Inc. via Sprott Group, “an “astounding” +92.9% jump in exports to Hong Kong, the most in 18 years, raises questions on data quality.”
Putting away our tinfoil hats for a moment, even if there’s no misinformation afoot, Chinese growth is slowing down. Presently, there are no indications from Chinese policymakers that they will try and stimulate their way out of this spell of moderation. Given recent rhetoric, it’s very unlikely that any such measures are taken at all, now or over the rest of 2013.
The days of “ultra-high speed” growth were in the past, Chinese President Xi Jinping said in early-April. Similar sentiment was promoted by Prime Minister Li Keqiang, who has said that China may have to accept annual growth rates below +7.0% in the coming years. Recent gauges of manufacturing activity suggest that 2Q’13 growth might edge lower towards +7.5% annualized. The HSBC services PMI index fell to 51.1 in April from 54.3 in March, suggesting that the slowdown is not just limited to the manufacturing sector. If there’s one indicator that may confirm these views, it is the Chinese Consumer Price Index.
The chart above illustrates the annualized Chinese inflation rate (yellow) against annualized Chinese GDP (white). The slowdown in Chinese growth accelerated in mid-2011 once price pressures started to fall, a sign that overall demand in the economy was weakening. Now, inflation has fallen by around four percent, tracking GDP’s diminished rate of +7.7% annualized from near +10.0% just two years earlier.
While it appears that the market and policymakers are going to push Chinese growth lower, the ripples these waves will create will be exceptionally important for the global economy. Already, signs of slowing Chinese growth have negatively impacted the Australian economy, where policymakers cut the main rate to a record low 2.75% in May.
The reasons behind the Reserve Bank of Australia’s rate cut are critically important, and are why we believe that, thanks to China, the Australian Dollar could suffer in mid-2013.