Just how bad was China’s July data? And what should be its impact be on policymakers as they assemble for their summer policy meeting in Beidaihe?
All main aspects of economic activity posted July results worse than consensus expected:
In terms of domestic demand:
- Retail sales growth slowed to 10.2% yoy, down from 10.6% in June, and with a monthly movement which was 0.3SDs below historic seasonal trends
- Urban fixed asset investment growth slowed to 8.1% ytd during Jan-July, down from 9% during Jan-June. For July alone, investment spending growth slowed to just 3.8% yoy, with the monthly movement 0.6SDs below historic seasonal trends. Crucially, private investment fell 1.2% yoy in July, and rose only 2.1% yoy during Jan-July. This is almost an investment strike.
- July’s utilized foreign direct investment fell 1.6% yoy, cutting the ytd to 4.3%. In dollar terms, July’s FDI fell 10% yoy.
In terms of trade and industry results:
- Industrial output growth slowed to 6% yoy, with a monthly movement which was 0.3SDs below historic seasonal trends.
- Imports fell 12.5% yoy in dollar terms, with a monthly movement 0.5SDs below historic seasonal trends.
And as far as monetary and financing indicators are concerned:
- In monetary aggregates, M2 growth slowed to 10.2% yoy in July from 11.8% in June;
- Yuan bank lending rose only Rm464bn on the month, which was 0.8SDs below historic seasonal trends, and which cut the yoy growth to 12.9% yoy (from 14.3% in June), and the lowest yoy since April 2006.
- Total new aggregate Rmb financing came in at only Rmb 488bn, the lowest monthly addition since July 2014. Not only bank lending disappointed, but in addition, there was a further Rmb510bn in net withdrawal of bankers’ acceptances, taking the net withdrawal over the last six months to Rmb1.922tr.
Such a swathe of disappointing data cannot be ignored: July was a weak month for China’s economy. However, it is easy both to overestimate how bad most of this data was, and also to ignore the largely-overlooked signs of life.
First, the weakness in retail sales, investment spending, industrial output and imports can all be seen partly as offsetting similar but opposite breaks against trend in June:
- Monthly movement in retail sales was 0.3SDs below trend in July, but in June was 0.7SDs above trend;
- Monthly movement in fixed asset investment was 0.6SDs below trend in July, but 0.5SDs above in June;
- Monthly movement in industrial output was 0.3SDs below trend in July, but was 0.6SDs above trend in June;
- Monthly movements in dollar imports was 0.5SDs below trend in July, but was 0.5SDs above trend in June.
- As for monetary and financing, the disappointment about M2’s 10.2% yoy growth was misplaced, since the monthly gain conformed tightly to historic seasonal trends.
The net result is that there has been little shift in the underlying 6m patterns of economic momentum. In fact, over the last six months, both domestic demand momentum and industrial/trade momentum has tracked sideways at around historic levels, and July’s poor data did nothing to change that picture.
But there were some real surprises, which threw up a real puzzle. The positive surprise was the continuing surge in M1 growth: M1 grew 25.4% yoy, which was the fastest since May 2010, and in July alone the gain was 0.9SDs above historic seasonal trends. What makes it more surprising is that it has happened at the same time as a genuinely serious slowdown in bank lending, total aggregate financing, and, most of all private investment.
One possibility is that although China’s investment environment remains seriously hostile, that is primarily because of the uncertainty of the political environment and policy framework. This uncertainty has led, and is leading, to the Chinese private sector concentrating on improving its cashflows, and indeed, increasing its holdings of cash for speculative purposes. Inasmuch as we can measure it, Chinese private sector cashflows are currently more strongly positive than expected. There are several indicators that this is so. First, of course, there is China’s private sector savings surplus:
i) the 2Q current account surplus came to US$59.4bn, which at Rmb847bn and equivalent to 2.1% of GDP, and 2.6% on a 12m basis.
ii) meanwhile, China recorded a fiscal deficit of Rmb459bn during 2Q, equivalent to 2.5% of GDP.
The result is that the private sector savings surplus rose to Rmb847bn, equivalent to 4.7% of GDP (vs 4% in 2Q15), and leaving the 12m surplus at 6.4% of GDP. Much of this improvement has been owing to the c7% yoy depreciation of the yuan against the dollar in 2Q. In dollar terms, China’s US$150.4bn trade surplus was only 0.9% higher than in 2Q15, but in Rmb terms it was up 9.3% yoy.
One would expect such a savings surplus to show up as a net positive cashflow into China’s banks: notoriously this has not been the case since the latter part of 2015, as capital flight and re-call of foreign lending stripped liabilities from the banking system. But with the relative stabilization of foreign capital flows reflected in the approximately stable foreign reserves seen since February, banks are beginning to see positive cashflow once again: in the three months to July banks took in Rmb1.97tr more deposits than they made in loans, during a period when historically the net intake has been Rmb1.6tr.
One can also, surprisingly, get some hint of these improved cashflows from China’s industrial profits data. In the 6m to June, although industrial sales grew only 3.1% ytd, industrial profits rose 6.2%, reflecting a recovery in margins to 5.7% in Jan-June 2016, up from 5.5% in the same period in 2015, and the highest in that period since 2011.
To return to the questions initially posed: China’s July data was weak but not disastrous. But policymakers should question why China’s private sector is scrambling to secure cashflow in the face of weak demand, and why they are now effectively on strike as far as investment is concerned.