How Is China's Economy Doing?

Jun. 03, 2019 8:37 AM ETYINN, YANG, GXC, FXP, PGJ, CN, TDF, CHN, CXSE, XPP, FCA, YXI, KGRN, FLCH, WCHN1 Comment
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Summary

  • China has been a major contributor to global growth, and its economic activity tends to have significant repercussions for the global economy.
  • To understand where the Chinese economy is in its growth cycle, the two charts below are perhaps the only charts one needs.
  • As with any economy, central bank policy is very important in China.

CEO Jan van Eck and Economist Natalia Gurushina discuss the state of China's economy and highlight two key charts for understanding where it is in its growth cycle.

China has been a major contributor to global growth, and its economic activity tends to have significant repercussions for the global economy. To understand where the Chinese economy is in its growth cycle, the two charts below are perhaps the only charts one needs.

Chinese Economy Health Check: PMIs
China PMI

Source: Bloomberg. Data as of May 31, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

Purchasing managers' indices (PMIs)1 are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, the manufacturing PMI is the number to watch for cyclicality. The non-manufacturing PMI shows a strong rate of expansion, which one would expect with the emergence of the "new China" economy - one that is increasingly driven by consumption. However, the manufacturing PMI shows several recent dips below the important 50-mark into contraction territory, corresponding to the "recession" in late 2018, followed by a recovery after Q1 2019, and then another fall into contraction territory in the latest May 31, 2019, release. These recent fluctuations suggest the recovery is shaky.

Understanding the Credit Cycle: Non-SOE Borrowing Costs
Borrowing Costs

Source: UBS. Data as of May 7, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Spreads are measured relative to average yield of 1, 3, 5, and 10-year bonds issued by the China Development Bank.

As with any economy, central bank policy is very important in China. In this chart, we can see that interest rates for the private sector fluctuate, whereas the interest rates paid by state-owned enterprises (SOEs) are pretty stable. Therefore, to understand the credit cycle, we point your attention to this private sector, or non-SOE, interest rate. It spiked in 2018, as a result of China's crackdown on shadow banking2, meaning tougher lending conditions for the private sector. These interest rates stopped rising in the winter of 2018 as the "drip stimulus" took effect.

For more insights on China, please see VanEck's outlook for China in 2019.

DEFINITIONS AND DISCLOSURES

1Purchasing managers index (PMI) is an economic indicator derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction.

2Shadow banking comprises private credit intermediation occurring outside the formal banking system.

Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) offer investments products that invest in the asset classes discussed in this commentary.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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