Why China’s recent slowdown may be more pronounced than investors realise

Craig Botham

Craig Botham

Senior Emerging Markets Economist

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The rise of China has been astonishing and its growing influence on the world is one of the economic forces discussed in our inescapable investment truths for the decade ahead. But economies don’t grow in a straight line. China is facing a transition period. It is a country we monitor closely and we believe its economy is currently doing worse than the official GDP data suggests.

We have constructed our own China activity indicator and find it exhibits far greater cyclicality than official GDP figures (see chart below). Our indicator includes monthly data on trade, retail sales, industrial production and investment in physical assets (such as machinery).

It captures the widely reported slowdown of 2014-15 that was largely absent from official GDP and the subsequent stimulus-led upswing in 2017. More recently, it has pointed to a renewed slowdown beginning in April 2018. Most importantly, this recent slowdown pre-dates the trade war with the US.

China's economy has slowed dramatically over the last year

Schroders China activity indicator

Source: Thomson DataStream, Schroders Economics Group. 29 January 2019.

Naturally this slower growth has prompted speculation that the Chinese authorities will take steps to stimulate the economy. This would have knock-on effects, with memories of 2009 raising hopes that such stimulus could also boost prices of industrial commodities. If history repeats itself, and China engages in massive credit and infrastructure stimulus, then prices could get a huge boost from the world's largest commodities consumer and any worries about price deflation could go away.

We do not see this happening. China looks increasingly constrained on both the fiscal and monetary policy fronts by a mix of high local government debt and concerns over financial stability and the currency.

We continue to see the main form of stimulus in China coming via central government tax cuts, rather than stimulus that might support demand for infrastructure or property. We therefore think it is highly unlikely that China will ride to the rescue of commodity prices, or global trade, on this occasion.

We will be updating our forecast for Chinese GDP soon, but a continued growth slowdown in Q1 and potentially also Q2 seems likely. Current stimulus efforts look too timid to drive a strong rebound in growth, though they may deliver stability in the second half of the year.

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