Navigating the Chinese economic crosswinds

The latest raft of macroeconomic data from China were disappointing, with GDP, industrial production, fixed asset investment and a bunch of other data all posting lower growth than most were forecasting.

Housing market malaise is at the epicenter of concerns, with construction and funding to the sector slipping in the month. That said, it seems more like a continuation of the trend seen at the end of 2014 rather than an acceleration in downturn.

The difficulty with forming a view on even a short term outlook on China is discerning how much of the weakness is cyclical and to what extent it is structural.

Part of the weakness is in part due to efforts to tighten conditions back in early 2014, with policymakers now changing tack. Interest rates being cut, financial conditions to some sectors has eased and purchasing restrictions on housing are being unwound. Shibor rates have also dropped notably since the start of April.

There are also no shortages of structural issues are intensifying concerns. Rapid growth in financing and massive investment in infrastructure poses risks to activity that may not be reversible via the ebb and flow of cyclical adjustments.

A further complication in discerning the trend is that it appears that Chinese New Year has had a much deeper impact on activity than in previous years. While this is symptomatic of the current downturn, it may be distorting the the level of activity as of the end of March as opposed to the average through the month as captured by most data releases.

One example of this could be the contrast between real activity and the slight improvement in the official PMI data. The slight upward revision in the March HSBC PMI data may also refect better conditions towards the end of the month as more data was collected from the flash estimates.

Another example can be gleaned from coal burn data which is provided intra-month. Coal-burn at power plants was very weak at the start of March as activity was slow to come back following CNY, which is in stark contrast to previous years.

But by the end of March, coal-burn at power plants was only 4% below 2014 levels. While it is still falling compared to last year, its a vast improvement on the start of the month.

We also get steel production data and the picture is quite different, with production shifting sharply lower in the final 10 days of March.

This partly appears to be due to destocking, with stock at CISA mills falling at the end of month. Given that growth in steel exports has fallen and the stock build at traders has been much weaker than in previous years, apparent consumption of steel is probably not as weak as headline production levels suggest.

But even so, it doesn't suggest that renewed infrastructure spending is starting to hit activity as the seasonal upswing in steel production begins.

It's always difficult when there are a lot of different cross currents on activity, but uncertainty does presents the most opportunity. It will pay to dig into the weeds of all possible indicators rather than run with the headlines.