Weekly Edge: China's Economy Slows, But Banks Don't Feel A Thing

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by: Invest With An Edge

By Troy Tanzy

China's manufacturing sector is near contraction, a representation of the broader economy, since manufacturing is such a large part. For October, the Purchasing Managers Index, largely recognized as a proxy for manufacturing industry health, fell well below expectations to its lowest point since 2016 for October. U.S. tariffs may be partly to blame as Chinese exporters begin to feel the brunt of the taxes, as seen in the "New Orders for Export" line in the following graph from The Wall Street Journal.

Banks in China, however, don't seem to be feeling any of the pain. Instead, net interest margins are rising at several of the largest banks in the country, along with improved asset quality, according to The Wall Street Journal. Chinese banks are notorious for holding bad loans. Because China's financial reporting isn't the same as it is in the United States, it is difficult for investors to discern the true health of the banks' balance sheets. Nonetheless, banks reported higher profits, which allowed them to write off more bad debts, enabling them to report improved balance sheet quality.

The Chinese central bank took several steps to loosen liquidity and risk restrictions in an effort to stimulate growth in the financial markets and in the yuan, which has tumbled this year. China's banking sector has benefited from the pullback of regulations, but the broader economy has not been able to observe the same type of relief.

Banks in China continue to do well, but there is no promise they will be able to clean up their balance sheets and improve the markets enough to bring growth and foreign investment back, which has been declining. China's frothy real estate market, slowing manufacturing, tariffs, and tumbling currency forms an ominous picture of the country's economy. It will take a drastic change to reverse the trend of investors pulling capital out of the country as the confidence in stable economic growth they once had erodes.

Sectors: Among the Sector Benchmark ETFs, the average momentum score decreased from -18.73 to -28.91. Utilities slightly lost their luster, dropping to the second spot. Consumer Staples continued their ascent, signaling investors are moving to lower-risk equity sectors. Everything else dropped wholesale except for Real Estate, which climbed a bit. The Real Estate sector, and others traditionally steady and high-dividend paying sectors, struggled amid the rising-rate environment. Materials and Energy now rest at the bottom of the list.

Factors: Among the Factor Benchmark ETFs, the average factor score decreased from -21.25 to -32.17 in another difficult week for markets. Every factor score was down last week, the largest detractor being High Beta, which fell 21 points. Dividend Growth lost just two points, holding on to its third-place spot. Yield fell six points and joined the rest of the factors in the red.

Global: Global Benchmark ETF momentum decreased this week from -26.91 to -37.64. Latin America fell another 12 points, making it the biggest detractor for the week. China remains in the bottom spot behind Emerging Markets. The World Equity category slipped 10 points.