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Chinese exports have boomed since 2019. That boom isn't (yet) turning to bust, but it is likely ending. That's a big issue when the rest of the economy is so weak. Even without a new covid outbreak, there's a rising risk of a real growth accident in 2H22.
The latest fall in Covid-19 cases could lift activity in August. But with property still very weak, inflation momentum softening and exports slowing, it feels that any upturn in growth would be short-lived.
The headline PMI was weak in July, and the details were soft too. There's no sign of the cycle finding a durable floor.
China's export market share gains show local firms remaining competitive, and that should make some individual equities interesting. But macro trends don't look strong enough to lift rates. Indeed, price indicators look more deflationary than inflationary.
As remarkable as the weakness in property the last year has been the strength of exports. The downturn in property will be more obvious if that strength in exports isn't sustained.
Beijing is relying on infrastructure for growth. But with property in recession, exports slowing, and consumption dampened by Covid, the growth hole that needs to be filled feels too large. Without policies that support these other sectors, the current cyclical recovery seems unlikely to persist.
June data improved, and in July the economic indicators will likely be stronger again. But it doesn't feel like the conditions are yet in place for a sustained recovery in economic momentum through 2H. Indeed, it feels like there is a rising risk that the recovery runs out of steam.
China's exports continue to show some resilience, but there's nothing to suggest a repeat of the 2020-01 boom that helped lifted the domestic economy out of the first covid shock.
Credit data were strong in June, and big enough to help short-term market sentiment. But the details were weaker, with the rebound being driven by government bond issuance.
The economy is still recovering from the lockdowns of April and May, and that recovery likely still has some room to run. But it feels like downside risks are now growing again. This week's export and monetary data will be useful in evaluating just how large those risks are.
June's data still don't show much inflation in China. And, outside of food prices, there's not much sign of that being about to change.
The themes for China cycle are unchanged: recovery; not huge stimulus; an ongoing commitment to zero covid; and a lack of underlying inflationary pressure. These themes need to be challenged before there are bigger shifts in China's financial markets.
The PMIs rose in June, but the neither the size of the improvement nor the details of the surveys suggest that the economic recovery out of Covid will be particularly strong.
Not only were the headlines in the PBC's quarterly sentiment surveys weak, but so were the underlying indicators that usually lead the overall economy. With little resilience in these indicators, the pace of recovery from the covid lockdowns looks likely to remain modest.
Our FCI remains accommodative. That, depressed activity, the fall in covid cases and a corporate sector that is somewhat of an even keel should ensure modest recovery. However, without a clearer policy push from the government, a real surge in growth in 2H feels unlikely.
That industrial profits fell in May isn't a surprise. But the fall was fairly modest, and revenue remains on an upwards trend, with corporate earnings likely being helped by the strength of commodity prices in recent months.
Covid numbers have fallen, which is good news for the cycle, given the government continues to make clear that zero covid is a pre-condition for everything else. Economic activity is recovering, but so far, the lift seems modest.
Given everything else we already knew about May, it wasn't surprising that property prices were also weak last month. However, there needs to be a turnaround soon to think the correction is just cyclical rather than structural.
The May activity data release didn't surprise. Most of the data were better than April, but not all. GDP may have grown YoY in May, but only just. Overall, the economy is recovering, but is still weak.
China remains on course for modest recovery. Covid-19 remains a downside risk, while the upside is muted without clearer policy support.
Just as the overall sentiment has passed through peak pessimism, so the credit cycle has lifted from the trough. But the credit data in May were mixed, and absent the emergence of a significant source of demand, the upside for credit is likely limited.
Foreign trade growth surprised to the upside in May. But the trend is still down, with export growth likely slowing to zero in the next few months.
Overall inflation moderated in May, and the leads for both PPI and core CPI continue to suggest China isn't likely to see higher inflation in the next few months.
No, it isn't only Hu Xijin who cares about growth. The government does too, albeit these days more because of the debt burden and politics than employment. But policy stimulus is underwhelming, seemingly because of a logjam in thinking: how to get more investment growth, but no more debt.
There's been more policy loosening, but it remains incremental. Upside risks to activity do exist as FCI continues to lift, but it is difficult as yet to get too excited about the outlook.