As we highlighted (see here), China’s macro data for October 2017 was disappointing with retail sales and industrial production missing consensus estimates, fixed asset investment was in line and inflation surprised on the upside. There was some impact from state-driven efforts to reduce pollution, but this issue will be an ongoing headache for decades. In big picture terms, the challenge for the Chinese leadership is to deflate a credit bubble in an orderly fashion, something which we’re not aware has ever been done on this scale. Notwithstanding the reach of China’s famed central planners, we doubt that they will be successful, a view which seems to be shared by the outgoing PBoC Governor who recently warned of a “Minsky moment”.
In the following charts of GDP, industrial production, retail sales and fixed asset investment, we showed that growth rates in key macro indicators are currently around the lowest they’ve been since the crisis or, in the case of the fixed asset investment, as low as they’ve been for nearly two decades.
Commenting after the October data releases, SocGen is getting equally bearish. To wit.
China’s activity growth decelerated more than expected in October for the most part, while inflation surprised on the upside. Supply constraints imposed by the air pollution reduction programme clearly played a role, while demand slowdown emerged only a little. However, the seeds have been sown for a full-fledged growth slowdown in 2018. Housing tightening has bitten deeper into housing sales; persistent cost-push inflation may dampen the private sector’s appetite for capex; and, most importantly, credit growth – which did not really slow much in October – is poised to trend further lower amid the resumption of financial deleveraging policies.
SocGen notes that while the slowdown in industrial production growth in October 2017 was concentrated in higher value-added sectors, traditional areas of upstream strength are locked in a deeper contraction.
IP growth dropped to 6.2% in October from 6.6% in the previous month. The high value added sectors – automobiles, electrical machinery and computers, telecommunication & other electronics (CTE) – accounted for most of the slowdown in the headline figures, although growth rates in these three sectors were still in the high double-digits. The anti-pollution campaign also left its mark on upstream material sectors, where part of the production was suspended during winter. Production growth of coking coals, cement, steel and aluminium were all in a deeper contraction.
The property sector has …read more