East Asia Econ

Our China cycle framework is that the muddle through of the last 18M is running out of road. The July PMIs look consistent with that, with weakness in pricing, jobs and confidence. The one remaining contrary indicator is the S&P mfg PMI, which has been strong, and for July will be released tomorrow.

A reminder of our roadmap for China's cycle over the next few months, which we summarised in an opinion piece in today's Nikkei Asia.

This is our monthly slide pack for China, that goes through the argument we laid out last week: how the Plenum and the US election together likely end the macro muddle through of the last 18 months.

Today's GDP release shows property activity is still collapsing and economy-wide pricing is weak. The PBC will struggle to hold up rates – and thereby the currency – if this week's Plenum doesn't provide a real boost to sentiment.

Even allowing for a change in credit intensity, June headline credit and money data are bearish. The one positive trend is data through May showing household demand deposits no longer falling so quickly. That shift continuing would help sustain China's macro muddle through.

We don't have conviction about what the Plenum will deliver, but we are confident that with next week's meeting, and then the US election, the macro and market muddle through of the last 18M is likely ending.

PPI deflation has been more cyclical than structural, and the strengthening in Q2 should continue into Q3. But core CPI remains very weak. Inflation is too low to support rates.

We combine quarterly household survey data with recently released annual GDP data to show why consumption isn't weak, what that means, and what there still is to worry about.

The official PMIs for June show China's cycle remains weak, weighed down by construction. There is unlikely to be a recovery until the property cycle stabilises.

PPI, as expected, was stronger in May. But any positive impact on market sentiment will be dampened by renewed weakness in core CPI.

The big export growth markets of recent years – autos, BRICs, ASEAN – have lost some oomph. But cyclically, the modest recovery in exports is continuing, particularly in CNY terms.

Without effective property policy, there is still a mildly positive macro story, based on a rebound in PPI, and stronger exports. The PMI offers support for the first, but not the second.

So far, the much-discussed rise in China's competitiveness has been most obvious in import substitution. With the export cycle now recovering, it is likely this year to also be seen in a renewed increase in China's global market share.

Friday's funding for buying inventories looks small. But with falling price expectations leading to a buyers' strike, it is a step in the right direction. This buyers' strike has cut construction. By keeping savings in the banks, it has lifted the S-I and CA surplus, and lowered velocity and CPI.

Property remains in a deep funk, and while the government talks confidently about a successful transition to new growth engines, all the policy action indicates increasing concern that real estate remains so weak.

A chart pack laying out our views on China. We argue that deflation is more cyclical than structural; consumption and services have recovered; and that property inventory policy would mean real upside risk.

The fall in credit in April, while unprecedented, can be argued away as reflecting a temporary shortfall in official bond issuance. It is more difficult to dismiss the equally unprecedented drop in M1 in the same way.

CPI deflation is stabilising, though because of food prices rather than domestic demand. The surprise in April was the lack of any lessening of PPI deflation, despite some improvement in leading indicators.

The big change in household behaviour isn't from spending into saving – in both respects, pre-covid trends have been regained. Rather, the shift is savings into bank deposits and out of financial and property investments. That matters for inflation, and for policy.

The PBC's Q1 depositor surveys show that it is less consumption sentiment per se that is weak than consumer price and property expectations. In this context, the news that the Politburo is studying ways to reduce property inventories is potentially significant for the macrocycle this year.

The mfg PMIs continue to suggest the industrial cycle, in terms of activity and pricing, is through the worst. For now, though, the strength is mainly in exports. As a growth driver, that shouldn't be dismissed, but the upturn would feel more sustainable if domestic indicators were improving more.

Cyclically, China's exports are improving, but the lift doesn't look particularly strong yet. Structurally, too, recent export performance has been a little underwhelming.

The belated release of the PBC's consumer survey continues to show falling price expectations, and so hint at rising real rates.