After the major disappointment to investors of the FOMC minutes released this Wednesday, everyone was concerned with what could come from China overnight in terms of GDP data.
If you were one of those brave souls (or just an insomniac!) waiting up until 2 am before going to bed, then you may have had a better night of sleep than many others just dreaming with numbers and anxiously waking up earlier than usual to check what the Chinese reserved for this terrifying Friday 13th.
Fortunately the day may be not as terrifying as the movie suggests. GDP numbers came in line with expectations at 7.6%. The Chinese economy is growing at a slower pace than in the previous quarters but still growing all the same. This number came as a major relief, as although being in line with expectations, many economists and analysts were afraid of it coming short of 7% and igniting a renewed sell off in equities.
If the numbers released can work as an antidote for the usual Friday 13th bad luck, then the best would be to follow the crowd and buy some risky assets today as many traders are waiting to pick a market bottom. But, unfortunately, a cruel reality may be hiding behind those numbers.
Recent data has been showing that loan growth is picking up in China. This at face value is good news since investment represents more than 46% of the Chinese economy. Nomura’s chief China economist Zhiwei Zhang says he tracks 32 indicators for the Chinese economy and that two-thirds are currently showing faster growth in May than in April. He stated that “having a mix of negative and some positive data are typical at turning points in the economy, indeed our conviction remains strong that the second quarter is the bottom of the economic downswing”. Unfortunately, I wouldn’t be that positive. The Chinese economy is driven by international trade, with exports representing 31% and imports 28.5% of GDP. The largest geographical area China is exposed to is the European Union – both in terms of exports and imports. China exports $356 billion to the troubled EU and imports $211 billion from the zone. With the fast deterioration we are experiencing in EU, it is hard to believe that China will remain resilient in the face of the serious Eurozone woes. Exports will certainly deteriorate and the Chinese government will likely not be able to sufficiently stimulate internal demand to substitute for the shrinking exports. Loan growth will thus likely not last for long.
Whilts economists & strategists may tweak economic indicators and create as many minor surrogates to track the Chinese economy as they want, sometimes the big picture can tell us more than all these detailed data points. Disregarding China’s most important trading partner’s current troubles is naive and unrealistic.