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China Data Indicates Broad Slowing Of Economy

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Includes: CHN, CN, CXSE, FCA, FLCH, FXI, FXP, GCH, GXC, JFC, KGRN, MCHI, PGJ, TDF, WCHN, XPP, YANG, YAO, YINN, YXI
by: Bruce Wilds

Unlike events that happen in Las Vegas that has prompted the slogan, "anything that happens in Vegas stays in Vegas", things that happen in China do not stay in China. This is obvious from the huge amount of wealth fleeing the country over the last few years. Chinese money and wealth flowing across porous borders can be seen in soaring house prices in Vancouver and most of Australia; however, the subject we want to focus on at this time has to do with recent data from China indicating a broad slowdown in activity. Data recently released points to the slowest investment growth in over 22 years which is a clear indication that regulatory crackdowns in the banking sector are starting to filter through to the broader economy.

Growth In China Is Expected To Slow

Reuters reports data coming out of China indicates the country's economy is starting to cool from a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers. This is thought to be the main reason China's central bank left short-term interest rates unchanged; this surprised markets which had expected it to follow a hike by the Federal Reserve. China's fixed-asset investment (FAI) growth cooled to 6.1 percent in January-May from the same period a year earlier, the slowest pace since at least February 1996. This is being seen as more companies have started complaining that it is harder to get financing and a growing number of firms are beginning to default on bonds.

The main reason China's headline growth has appeared so resilient up until now is that government policy has focused on the banking sector rather than corporate debt reduction or deleveraging. With the GDP expanding at a steady 6.8 percent for three straight quarters, many China watchers have been optimistic China's multi-prong crackdowns on pollution, questionable local government spending and off-balance sheet "shadow" financing was moving along without a hitch. Of course, most of those projecting huge future growth point to OBOR and the powerful engine of infrastructure spending to pull the economy forward and even the fact this slowed to 9.4 percent in the first five months, from 12.4 percent in January-April and warnings from the IMF of malinvestments do little to dampen their enthusiasm.

Credit And Debt Drive China's Growth

With many infrastructure projects in the pipeline, it is a relatively easy sector for the government to inject stimulus if it chooses. As for other data, May industrial output rose 6.8 percent from a year earlier, versus estimates for a small dip from April's 7 percent. Retail sales grew 8.5 percent in May, the slowest since June 2003, analysts had expected a slight pick-up to 9.6 percent. Still, at this point, even as overall credit growth and private sector investment cools, it is expected the economy will maintain relatively sound in the second half and grow around 6.5 percent for the full year, in line with the government's target.

Trade stood out as a bright spot in China's latest numbers, but the threat of rising trade tensions with the United States could end that and exporters front-loading their shipments may have added to those numbers. Still, key to what happens is the policy of the central bank (PBOC) where recent easing measures appear to have had little positive impact on the economy. To some extent, the PBOC is trapped, it can't hike over fears of slowing down the economy too far, and it can't ease or else risk another round of capital outflows and a spike in inflation. It is interesting how turmoil in Europe caused by problems flowing from Italy, the summit between Trump and Kim, and rumblings in emerging markets have temporarily taken eyes off of China.

In the past, the massive amounts of new credit being created in China have caused havoc in markets across the world and pushed up total debt to dangerous levels. This is all occurring at a time when the amount of geopolitical upheaval going on between Washington and Beijing is extremely high and a slew of trade data from China has not been released on time. This has increased concern over the lack of transparency of future data releases and has caused suspicion to grow over Chinese intent and if they are hiding something. If indeed, things that happen in China do not stay in China, then we should be prepared to see any problems or mishaps in China to spread and ripple outward to infect global markets.