China

China: GDP Stasis Hides Potential Profits Surprise

China’s reported real 2Q GDP growth unchanged at 6.7%, but more importantly showed a modest acceleration in nominal GDP. If maintained, this acceleration will result in a stabilization or better of asset turns by the end of the year. This would imply a reversal of the long-term fall in return on assets which has been the central economic fact of the last decade.  To complement this, the 12m to June saw a near-stabilization of monetary velocity (GDP/M2), suggesting that the deterioration in the allocation of China’s savings is also bottoming out.  In addition, any recovery in topline growth is likely to improve profitability very sharply, since even in the subdued markets of 1H2016, China’s industrial operating margins have started to record. 

The normal response to these circumstances is a quickening of investment spending. But in China’s case, all the gains in quarterly and monthly data are undercut by a slowdown in private investment spending so severe that by June there was no yoy growth at all. Whilst the central authorities have responded by sending out inspection teams to harry local governments into more investor-friendly initiatives, it is Xi Jinping’s anti-corruption which is the most likely factor currently deterring private investment. If corruption in China is endemic throughout its government system - and China ranks 83rd out of a global 167 on Transparency International’s 2016 Corruption Perception Index - any enthusiastically pursued anti-corruption campaign must generate tremendous investor uncertainty.