What’s Up with China These Days?

As I mentioned in my Australian Economic Data Roundup yesterday, global growth prospects and risk sentiment are largely affected by China’s economic performance. In today’s edition of Piponomics, I’ll zoom in on how the world’s second largest economy is doing so far.

Trade Balance

china data components

Hmm, signs of weakness in underlying figures?

If you’ve been paying attention in our School of Pipsology lesson on Major Economies, then you’d know that a huge chunk of China’s economic growth comes from its international trade activities. Its latest trade balance came in much stronger than expected at 49.8 billion USD, up from the previous 47.3 billion USD surplus, as exports jumped by 9.4% on a year-over-year basis.

While these headline figures look promising, the underlying components of the report reflect a few signs of weakness. For one, the large trade surplus was also spurred by an unexpected 2.4% slump in imports, which could be a sign of dwindling domestic demand. Apart from being a potential drag on Chinese GDP, this decline in demand could also pose a threat to Australia’s commodity exports later on.

Inflation

The latest CPI and PPI reports from China also turned out to be disappointing, as both reflected subdued price pressures. For the month of August, the annualized CPI fell from 2.3% to 2.0%, lower than the estimated 2.2% reading. Meanwhile, producer prices chalked up a 1.2% year-over-year decline, worse than the projected 1.1% drop and the previous 0.9% decrease. This also marks the 30th consecutive month that the PPI has been falling!

For most economic analysts, this downturn in inflation goes to show that the PBoC has room to add stimulus in order to boost growth and price levels. Falling commodity and energy prices have been mostly to blame for the slowdown in inflation, prompting market watchers to worry about deflationary prospects in China. In turn, this could translate to even weaker domestic demand. Yikes!

Industrial Output

Output has been far from impressive as well, as industrial production slowed from an annualized 9.2% to 9.0% in July. Fixed asset investment also slumped from 17.3% to 17.0%, indicating that companies in China might not be looking to expand operations anytime soon.

This business slowdown has mostly been blamed on concerns about a property slump in China and the rise of bad loans, both of which have weighed on credit growth. Apart from that, slowing domestic demand and the low inflation outlook are discouraging businesses from ramping up operations at this point.

Over the weekend, China is set to release the latest industrial production and fixed asset investment reports for August but the outlook is still looking dim. Analysts expect to see another slowdown in industrial production to 8.8% while fixed asset investment could fall further to 16.9% on an annualized basis. Make sure you get your hands on these releases before the start of the next trading week, as these might lead to forex price gaps!

Do you think China is in for a deeper economic slowdown? Share your thoughts in our comment box or cast your votes in our poll below!