U.S. 'Prudent' to Avoid China Currency Manipulator Tag, Jalinoos Says
With China’s economic expansion expected to slow as trade wars heat up, a closer look at the data may offer a better look at what’s really happening in the world’s second-largest economy.
Gross domestic product probably expanded 6.6 per cent from a year earlier in the third quarter, according to a Bloomberg survey of economists ahead of the report, due Friday morning in Beijing. Forecasters also expect data on retail sales and fixed-asset investment to show growth held steady in September, while growth of industrial production probably ticked a notch lower.
The reports will offer details on the state of China’s economy through the end of September, when the U.S. escalated the ongoing trade war. On Sept. 24, the two countries imposed a new round of duties on each other’s exports, with the U.S. pledging to increase them further on January 1, unless an agreement is reached before then. Chinese manufacturers say the current tariff levels are manageable, but that the increases next year would be a game-changer.
To better gauge China’s economy, here’s what to watch in the reports:
Stronger Trade Boost to GDP
Paradoxically, the trade war may be boosting shipments now. The unexpected acceleration of export growth in September should boost the contribution net exports make to the expansion in the quarter. The stronger-than-expected performance was probably thanks to front-loading of shipments to the U.S. ahead of implementation of the new tariffs, according to Betty Wang, a senior economist at Australia and New Zealand Banking Group Ltd in Hong Kong.
She flagged a jump in electrical machinery sales in particular -- China’s biggest export to the U.S. -- as partly responsible.
But industrial production data show growth in the manufacture of such products has been dropping fast since the middle of last year. The growth rate in August from a year earlier declined to 3.3 percent, the lowest in 12 years of data.
If Friday’s data show growth in this area continuing to decelerate, it may confirm the temporary nature of the export boom.
In the short term, job losses from the effects of the trade war will be a key concern. China will publish two versions of its unemployment rate Friday -- a quarterly measure based on filings for unemployment benefits, which has fallen in recent quarters, and a monthly indicator based on household surveys, which is more akin to measures published in the U.S. and Europe. That one fell in the second quarter before rising again.
Despite the trade war, growth in fixed-asset investment among manufacturers has actually accelerated since the start of the year. Investment in property development has also grown in 2018 at the fastest pace in three years. Infrastructure investment growth, on the other hand, has decelerated from 20 percent last year to just above 4 percent.
The question is whether sentiment is strong enough to continue propelling manufacturing investment at that level, and whether recent measures taken by the Chinese government to insulate the economy from trade-war fallout will start to show up in the infrastructure spending data.
Infrastructure investment should be a bit better in September "on the back of accelerated local government special bond issuance," Morgan Stanley economists Jenny Zheng, Robin Xing and Cai Zhipeng wrote in an Oct. 10 report. "However, investment growth in the manufacturing sector has likely moderated due to weaker business sentiment in the face of ongoing U.S.-China trade tensions, and property FAI could have softened amid weaker property and land sales."
Retail sales growth has slowed since the beginning of the year, in part thanks to the continued decline in vehicle purchases. Those were about a third of the value of all consumer goods sold in August, when they dropped 3.2 per cent from a year earlier.
Total vehicles sold fell 11.6 per cent in September from a year earlier, according to a different data set from the China Automotive Information Network, which doesn’t bode well for the official statistics to be published Friday.
Income Versus Consumption
In the longer term, China’s task is to transition from an economy based on investment and external demand to one rooted in domestic consumption, and the key to achieving that is boosting labor’s share of income over time.
Not only will data on household income growth to be published Friday give an update on how that’s going, but a comparison to household consumption growth will also provide an indirect read on consumer confidence.
From the end of 2016 through the first quarter of 2018, growth of disposable income outpaced that of consumption, implying a build-up in household savings. But in the second quarter of this year, the relationship flipped. Whether that continues will be a point of interest.