China released grim economic data this weekend suggesting that the economy will further weakness in the months ahead. The worst of the data concerns industrial production, which slowed to its lowest level since the crises year 2008.
According to Westpac’s Singapore-based strategist Jonathan Cavenagh, over the weekend China released industrial production (IP), fixed asset investment and retail sales data for August.
Summarizing data points in an article published in Business Insider Australia, Cavenagh noted that all prints came in weaker than expected but the very sharp deceleration in year-on-year IP growth will draw the most attention. IP rose just 6.9% versus 8.8% expected and a 9.0% print in July. Retail sales rose 11.9% versus 12.1% expected and 12.2% previously, although the month-on-month number improved from July. Fixed asset investment was up 16.5% versus 16.9% expected and 17.0% previously. In addition, the national statistics bureau released other data on Saturday, which showed that house sales dropped close to 11% year-on-year through January to August, versus a 10.5% drop in the first 7 months of the year. It also came after weaker monetary aggregate figures on Friday.
According to Bloomberg economist Tom Orlik, that slowing in the housing market has been the main driver of all of this discontent. "A sector that was once the main driver of China’s growth is now suffering a slump in sales and construction. The area of new property under development shrank 14.4% year-on-year in the first eight months of 2014," he wrote in a note.
The big picture can be viewed in the following chart:
A surprise is not that China is slowing- after all, to some extent China wants to slow down- but that authorities are letting the economy slow as fast as it is. They seem to be showing a lot of willpower not stimulating the economy.
The Chinese government could always put a Band-Aid on this situation and stimulate the economy by cutting interest rates. However, the Xi administration has indicated that it’s serious about fiscal reform this time. Earlier this month it passed a budget law that sets new guidelines for how governments can plan spending, financing, and revenue. The Xi administration has to either stimulate the economy, essentially back tracing on reform, or risk missing its 2014 growth target, according to some analysts, as Linette Lopez from Business Insider reports.
Anyway, anything associated with China is going down. Oil, which has been weak for three months, is tanking, down over 1%. Copper is weak too. The Australian Dollar, which often moves based on China’s economy, fell briefly below 0.90 against the US dollar.
The Hong Kong stock market, which is on a 6-day losing streak, lost nearly 1%. Emerging markets, many of which have their fortunes tied up to China in some way due to trade, are on their largest losing streak since 2012, according to FT.
Slowing down of China’s growth is a flashback nobody in markets wants to experience and indicates that, unless the government wants to step in, China will be shrinking for the near term at the very least.