Economic Snapshot: China

Hello, forex friends! China had a data dump last week, and if you somehow missed it or if you’re just curious on how China’s economy is doing nowadays, then this Economic Snapshot can help you out.

Note: As with all Economic Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. However, the bullet points provided highlight the underlying details and trends that give the numbers their proper context.

Growth

  • China’s Q2 2016 GDP expanded by 6.7% year-on-year, matching the previous quarter’s rate of expansion and beating expectations that it will slow to 6.6%.
  • In terms of trend, the year-on-year reading has stabilized after growing at an ever slower pace for the three consecutive quarters.
  • The current reading is also the slowest rate of expansion since the 2008 global financial crisis.
  • China is also still growing within the the PBoC’s growth projections.
  • For reference, the PBoC’s target range for annual GDP growth in 2016 is 6.5%-7.0%.
  • Quarter-on-quarter, China’s Q2 GDP grew by 1.8%, beating the consensus reading of 1.6%.
  • This is the fastest growth rate since Q3 2015.
  • The previous reading was also slightly revised from 1.1%, which is the lowest reading on record, to 1.2%, which is still the lowest reading on record.
  • The better-than-expected reading broke two straight quarters of deteriorating quarter-on-quarter growth.
  • In terms of output, annual GDP growth was driven mainly by the 6.0% increase in combined industrial output from mining, manufacturing, and utilities, which is a faster growth rate than Q1’s 5.8%.
  • Manufacturing, together with mining and utilities, still constitute the bulk of China’s GDP in terms of output, accounting for about 33.98% of total GDP.
  • This was offset by weaker growth from the relatively large financial industry (5.3% vs. 8.1% previous).
  • There was no GDP breakdown using the expenditure approach, but the National Bureau of Statistics (NBS) released a separate report which stated that fixed asset investment grew by 9% during the first half of 2016.
  • This is slower when compared to the 9.6% increase in investment that was printed during the first half of 2015.
  • Total trade value for the first half of 2016 also fell by 3.3% year-on-year, with exports falling by 2.1% and imports down by 4.7%.
  • These were offset by a 6.5% increase

Inflation

  • The month-on-month headline reading for June CPI is still in negative territory since it came in at -0.1%.
  • It’s an improvement over the previous month’s -0.5% at least.
  • Month-on-month headline inflation has been in the red for four consecutive months now.
  • The main reasons for the negative reading were the 0.9% decline in food prices and the 0.3% fall in the cost of clothing.
  • The 0.9% decline in food prices in June is slower compared to May’s 1.8%, however, which is why the headline reading for June improved.
  • Year-on-year, CPI grew by 1.9% in March, which is lower than May’s 2.0% and a 5-month low to boot.
  • Annual CPI has been sliding for the second consecutive month now.
  • And for reference, the PBoC’s target for annual inflation in 2016 is around 3.0%.
  • The slower annual increase in was mainly due to the 3.7% increase in food prices, which is smaller than the previous month’s 4.7% increase.
  • The past fall in oil prices is still weighing down on CPI, but it seems to be passing through since it was less of a drag in June (-8.1% vs. -11.5% previous).
  • All other components had minimal contributions, which is why the core reading (excludes energy and food prices) held steady at 1.6%.

Business Conditions & Sentiment

  • The official manufacturing PMI reading for the June period from the NBS came in at 50.0 (50.1 previous), which means that China’s manufacturing sector stagnated overall.
  • The production sub-index increased from 52.3 to 52.5, so manufacturing output is growing steadily, but new orders slid from 52.7 to 52.5, so demand seems to be weakening.
  • Payrolls also contracted at an accelerated pace since the employment sub-index decreased from 48.2 to 47.9.
  • The official PMI report looks bad, but the manufacturing PMI reading from Markit/Caixin is even worse, since it dropped from 49.2 to 48.6.
  • This is the poorest reading in four months.
  • The manufacturing PMI reading from Markit/Caixin has been below the 50.0 stagnation mark since February 2015.
  • Commentary from the Markit/Caixin report also disagreed with the official PMI report in that both production and new orders decreased, albeit only at a marginal pace.
  • The official non-manufacturing PMI reading from the NBS climbed from 53.1 to a three-month high of 53.7 in June.
  • Looking at the components, the official services PMI came in at 52.2, which is an improvement over the previous month’s 52.0 reading.
  • The construction index, meanwhile, surged from 59.4 to to 62.0, thanks to an increase in construction activity.
  • The services PMI report from Markit/Caixin reported a faster rate of improvement in the service sector, since its reading advanced from 51.2 to 52.7.
  • The rapid improvement was due to a stronger expansion in business activity.
  • Total industrial production in China grew by to 6.2% year-on-year in June, which is a bit faster than the 6.0% increase in May.
  • The improvement was due to the 4.0% increase in production output of electricity, water, and other utilities.
  • Manufacturing output grew by 7.2%, the same pace as in May.

Consumer Sentiment & Spending

  • China’s official consumer confidence index jumped from 99.8 to 102.9 in June, so Chinese consumers seem to be an optimistic bunch.
  • The jump in consumer sentiment translated to stronger consumer spending in June since retail sales jumped by 0.92% month-on-month (0.76% previous).
  • The jump broke two straight months of worsening retail sales readings, and is the highest reading in a year to boot.
  • The annual retail sales reading also jumped to a six-month high of 10.6%, beating expectations that it will increase by 10.0%, same as last time.
  • The recent annual reading also broke two straight months of slowing growth in retail sales.

Trade

  • China’s dollar-denominated trade surplus in June was $48.11 billion, beating the expected $46.64 billion, but below the previous month’s surplus of $49.98 billion.
  • The details also take some shine away from the headline reading, since exports contracted by 4.8% year-on-year.
  • This marks the third consecutive month that exports have been contracting on an annual basis.
  • Imports, meanwhile, declined by 8.4% year-on-year (-0.4% previous).
  • Imports have been declining non-stop since October 2014.

China's Economy: Growth

China's Economy: Inflation

China's Economy: Business Conditions

China's Economy: Consumer Spending & Sentiment

China's Economy: Trade

Putting it all together

China’s economic growth rebounded on a quarter-on-quarter basis but maintained its pace on an annual basis. The annual reading did beat expectations and is still well within the PBoC’s projected growth rate, which has led some analysts to believe that further stimulus from China may be unnecessary.

Inflation is a weak point, though. And the annual CPI reading is slowly drifting lower and away from the PBoC’s target. And while business conditions in the construction and service industries are looking good, business conditions in manufacturing sector, the main driver for GDP growth, is a bit more sketchy since the official reading from NBS and the one from Caixin/Markit are conflicting, with NBS saying that business conditions are stagnant overall but production continues to grow while Caixin/Markit is saying that the manufacturing sector is contracting, and production with it.

Whether you believe the official data from NBS or the one from Caixin/Markit, is up to you. But in case you doubt the official data, just know that you’re not the only one, since some say that the official Chinese numbers are politicized to put the Chinese government in a good light, so much so that some are trying to find other ways to get more reliable data.

Going back to GDP growth, industry, which includes the manufacturing sector, still accounts for 33.98% of China’s GDP, which is a pretty huge chunk and also shows that the Chinese government’s desired shift away from an export-oriented manufacturing economy to one based on domestic consumption, high tech industry, and services is not progressing very quickly. At the same time, business investment slowed and both exports and imports have been contracting, so there are some still some vulnerabilities in the Chinese economy.