“Hidden” leading indicators give reason for Chinese growth concern

August 20th, 2018 by Hubert Fromlet, Kalmar

No doubt, China has not given encouraging growth signals during our European holiday season. I am here not so much focusing on weaker official statistics (GDP, public investment, real growth in retail sales, etc.) but rather on analytically mostly unwatched or neglected signals.

But also hard statistical data were not really favorable – neither the PMI nor production indicators. The escalation of the trade war with the U.S. dampened business confidence, even if Chinese  trade numbers so far did not give particularly negative results (which according to experience and textbooks indeed could take some more time). But the Chinese currency yuan weakened visibly (not so much hidden this time but not very much related to growth concerns by the analysts); so did the two Chinese stock exchanges.

In this analysis, I do not focus very much on hard Chinese statistics. Major parts of Chinese are not (completely) reliable or have their quality shortcomings for other reasons. However, it is worth-while  paying increasing attention all the same when the Chinese themselves publish (slightly) weakening statistical numbers; such an indication came also in July from rising urban unemployment. In this also officially confirmed negative statistical sense growth could indeed be on its way to move in  a more dampened direction.

On the other hand, two developments outside the statistical sphere – which usually are not really observed by Western analysts in a more specific growth perspective – make me usually particularly curious in an economic growth context. They are

– (unexpected) loosening of monetary policy without interest rate cuts, and more than a very temporary weakening of the yuan.

Loosening of monetary conditions (by  decreasing cash requirements for the banks) has indeed taken place more recently despite the debt problem of local governments, firms and private households. It should be observed whether there is more to come in the nearer future.

The real reasons for the weakening of the currency yuan (also called the renminbi,  RMB) in 2018 may be in reality somewhat more opaque. First, there may be fundamental explanations for the drop of the yuan based on the existing  economic imbalances and also at least some negative impact from the trade war with president Trump, which means induced by market forces. Second, there may also have been Chinese political efforts to drive the currency down. My own guess is that reality may include both components. Perhaps the strong fall of the RMB was somewhat overdone but remarkable all the same.

Anyway, there is good reason to believe that Chinese GDP also officially will continue to slow down in the foreseeable future – but slightly and not very visibly apart from probably or possibly (net) exports. GDP growth around 6.5 percent for 2018 seems still be achievable in official real terms.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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