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Mainland tourists take selfies in front of the Hong Kong city skyline. Chinese tourism numbers, including international travel, have held up despite uncertainty regarding the broader economy. Photo: Bloomberg
Opinion
Macroscope
by Aidan Yao
Macroscope
by Aidan Yao

China’s economy hasn’t hit bottom yet. The good news is that it will in the next quarter

  • Despite decent sales during the Lunar New Year, declining demand is likely to push China’s economy further down before loosening credit takes effect in the second quarter and sparks a recovery
Aidan Yao
Aidan Yao
Why you can trust SCMP

A mixed bag of macro data so far in 2019 suggests that while the growth momentum in the Chinese economy remains weak, there is a glimpse of light at the end of the tunnel.

To be fair, the volume of data that may be used to gauge the economic pulse is not great at the moment. Given the seasonal distortion of the Lunar New Year, the National Bureau of Statistics has as usual decided to postpone the release of key January activity data until mid-March. This creates a hiatus in the data flow that makes assessing the condition of the economy more difficult.

Despite the lack of regular data points, seasoned China watchers know where to look. To start, various government ministries publish consumer spending data during the Lunar New Year holiday, which can be used to gauge the current status of domestic demand.

The results, however, can be interpreted differently, depending on how you look at the data. For optimists, the record-breaking retail sales, strong box office revenue and solid growth in tourist numbers – particularly international travels – suggest that household spending has held up well despite the general economic downturn. Even comparing these numbers with the same period last year, the 8.5 per cent (year on year) growth in retail sales is still decent, better than the December sales growth of 8.2 per cent.

However, for pessimists, the growth rates of Lunar New Year spending are the lowest either on record or since the 2008 global financial crisis. Together with a decline in Consumer Price Index inflation to a 12-month low, the data suggests weak growth momentum in consumer spending, even though the level of growth remains respectable.
Chinese shoppers are reflected on a fashion boutique’s window panels in Beijing on February 1. Slowing growth in Chinese consumer spending has investors worrying even as US President Donald Trump signals that a trade war breakthrough may be possible. Photo: AP
Besides consumption, the surprise rebound in January export growth and a mild pickup in the manufacturing purchasing managers’ index (PMI) are also subject to different interpretations. These improvements, indeed, seem to be at odds with the weak trade and manufacturing data released by other countries in the region.
Notwithstanding the mixed data, the worst of China’s cyclical downturn is still ahead of us. Even though consumer spending has held up so far this year, high household debt and slowing income growth is likely to exert renewed pressure on consumption in the rest of 2019.
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In addition, January’s export growth rebound should prove transitory, as global demand remains weak and there is no sign of a trade deal between the US and China. Even with an extended trade war truce beyond March 1, the existing tariffs – on US$250 billion in Chinese goods – and further “payback” to previous front-loading purchases is likely to weigh on China’s export growth in the coming months.

The weak external demand is likely to amplify the downturn in domestic manufacturing and industrial production. While this may not necessarily imply a further decline in the PMI – given it is already at a three-year low, it does mean that the index is unlikely to rise above 50 any time soon.

Further weakness in industrial prices is expected, with the producer price index already teetering on the edge of deflation. The latter will bode ill for corporate profitability and may hinder equity market performance, as seen in 2012-2014.
Trade war deal or not, the damage to the world economy has been done

Adding insult to injury, the recent weak sales numbers from many property developers is cause for concern. With the housing market showing no signs of stabilising, real estate investment growth will slow further, leading to lower land sales that may constrain the government’s ability to boost infrastructure spending.

All in all, it has not been a positive start to the year for the Chinese economy, once we look through the data noise.

But fortunately, it’s not all bad news.

While the concurrent data has remained relatively weak, there are genuine “signs of life” in some leading economic indicators. For example, the record-breaking January credit data indicates that the People’s Bank of China’s efforts to restart the economy’s credit engine have started to pay off.

Analysis of past economic downturns suggests there is typically five to six months of lag between the recovery of credit growth and stabilisation in the real economy. If that relationship holds, one should expect the turnaround in the credit cycle to place a floor under the economy in the coming months.

Overall, the Chinese economy is expected to find a cyclical bottom sometime in the second quarter, before staging a tepid recovery in the second half of the year.

Aidan Yao is a senior emerging Asia economist at AXA Investment Managers

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