Chinese trade balance data for September released on Thursday, October 13th, have fueled concerns on the outlook for the world economy. Exports fell by 5.6% y/y and imports increased by 2.2% y/y. The data were worse than expected by consensus, which estimated exports to rise by 2.5% and imports by 5.5%. With the Yuan fallen against the US Dollar, exports fell by 10% and imports by 1.9% when measured in US Dollars.
The decline of exports had a negative impact on the main international equity markets as it was considered a sign that the world economy is weaker than previously estimated. Following weaker than expected exports, the Yuan/US dollar exchange rate rose to the highest since 2010 (USD/RMB at 6.72) as investors feared that the Chinese government could favor a new devaluation of the currency (-3.6% against the US dollar year-to-date) to re-launch exports.
The decline of exports disappointed investors as it was against economic data released over the last few weeks. For example, the export orders index in the PMI manufacturing index for September rose to 50.1, the highest value since November 2015. In addition, the significant strength in August processing imports (up 11.9% m/m) was a positive forward-looking indicator for exports. For this reason, the disappointment in September trade activities may partly reflect temporary weather effects in a number of coastal provinces.
However, concerns on the outlook for Chinese economy diminished following the release of September inflation data. The producer prices index rose by 0.1%y/y, the first positive reading in fifty-four months, and the consumer prices index rose by 1.9% y/y, higher than the 1.6% y/y expected by consensus. These data eased concerns on the possibility of a fall in deflation.
The publication next week of Q3 GDP data and of industrial production and retail sales data for September will give more information on the outlook of the Chinese economy. According to consensus estimates, GDP should expand by 6.7% y/y, in line with Q2 growth rate. The data should not signal any weakening of Chinese economy in the short term and would confirm IMF estimate for a 6.6% GDP growth in 2016. The IMF estimates a softening of GDP growth to 6.2% in 2017.
Industrial production and retail sales data for September should also signal that short-term economic outlook for China remains positive. According to consensus estimates, industrial production should expand by 6.4% y/y, up from 6.3% in August, and retail sales by 10.7%, from 10.6% in August. We see the highest growth rate of retail sales compared to industrial production as a sign that the rebalancing of Chinese economy from investments to consumer spending is continuing.
In our view, the main sources of concern for the Chinese economy are the high level of private debt and the sharp rise of housing prices. In August new private loans increased 17% to RMB948bn. This could exacerbate the problem of non-performing loans, which according to the latest figures have reached RMB461bn, quadrupling over the last four years.
Housing prices have risen by over 20% y/y. The Chinese Government is trying to limit housing inflation relying heavily on prudential measures at the local government level to suppress demand. The most-adopted measures include resumption of home purchase restrictions, higher minimum down-payment ratio and the introduction of price-control mechanisms that aim to cap property and land prices. Such measures could have the effect of reducing new homes sales in H1 '2017.
We think that most challenging task for the Chinese government is to manage the risks coming from lower housing prices and softer world economy on the credit market.
In this scenario, we expect the underperformance of the Chinese equity market compared to other equity markets (the Shanghai Composite index has lost 13.4% YTD while the Brazilian Bovespa has gained 42%) to continue until the issue of bank loans is resolved or until a complete rebalancing of the economy.
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