1. CHINA’S DRAG ON THE GLOBAL ECONOMY INTENSIFIES
|The Caixin Composite PMI dropped a full -1.6pts in OCT to 50.5, which represents the lowest reading since the global deflationary lows of mid-2016.
China’s OCT Headline PPI data (↓ -30bps to 3.3% YoY; breaking down from a TRENDING perspective) further underscores the disinflationary impulse upon the global economy stemming from our #ChinaSlowing theme.
The CNY is down -9% vs. the USD over the trailing six months and will be down -8% YoY in 1H19E assuming no change to the current quarterly average exchange rate, which means the inflationary impulse to import prices stemming from a full implementation to 25% tariffs on the $541.6B in goods the U.S. projected to import from China in 2018E will be more than offset by annualized dollar strength during that interval.
Chinese policymakers are officially panicking with respect to the growth outlook (e.g. strict lending quotas for private firms), but we continue to believe they remain fairly constrained on the monetary policy front until we see a dovish pivot out of the Federal Reserve – likely a mid-to-late Q1 event.
#ShortEM (introduced 1/4/18 under the title, “#UnderweightEM”):
- Beijing Remains Handcuffed (10/18): With respect to Chinese monetary policy, we obviously track a deluge daily/weekly/monthly data – e.g. OMO, MTLF, RRR, BPR, 7DRR, SHIBOR, etc. – but for those of you who want to boil it all down to what it actually means for economic growth on the mainland, there’s one number you need to track on a monthly basis – i.e. the annual growth rate of bank loans.
- Why? Because that’s the best way to track incremental liquidity in the Chinese economy, which remains structurally challenged from an existing-supply-of-likely-unserviceable-but-technically-not-nonperforming-credit perspective. Yesterday’s monthly monetary figures were telling in that bank loan growth actually slowed -4bps in SEP to 13.17% YoY, with the TRENDING momentum essentially flat as well. These numbers are well shy of the 15-16% average annual growth rates seen throughout Beijing’s prior liquidity wave, which persisted from late-2015 through 1H16. Recall that said wave of liquidity helped catalyze the SOE fixed asset investment boom that rescued the “Old China” economy from the brink of collapse and ultimately catalyzed the “Globally Synchronized Recovery”, as well as Xi’s “coronation”. The latest numbers – including the sharp deceleration in M0 Money Supply growth (↓ -110bps to 2.2% YoY in SEP; TRENDING lower) continue to suggest Beijing remains handcuffed by international monetary pressures from providing the degree of monetary stimulus it would need to comp cycle-peak comparative base effects over the next two quarters. The A-Shares (↓ -2.9% overnight and ↓ -31% from its 1/29 YTD high) tells you all that you need to know about the likelihood for China coming to the rescue of global cyclical exposures in the near term. In that light, it should come as no surprise to see Japanese Export growth plunge -780bps to -1.2% YoY in SEP – the slowest growth rate since OCT ‘16.