Regulatory policy

Growth in China – One-Time Failure or Policy Error?

Igor Kutiaev/iStock via Getty Images

China’s cyclical slowdown may have lasted longer. Is it time to expand the policy toolkit beyond proven infrastructure investments?

China activity gauges in the contraction zone

“Miscalibration of policies” was among the main risks mentioned in discussions of China’s cyclical slowdown at the IMF Spring Meetings in DC. The latest activity gauges are likely to fuel these concerns. the official manufacturing Purchasing Managers Index (PMI)1looked weak, falling to 47.4 in April, but the surprising drop in the services PMI to 41.9 (see chart below) shows that the zero-COVID policy is having a disproportionate impact on consumption. Two other details that caught our attention are (1) a sharp shift into the contraction zone of the public enterprise activity gauge (48.1) and (2) a sharp deterioration in the PMI for new export orders ( 41.6). This tells us that the two favorable winds for growth (external demand and state-run manufacturing) which helped a lot during the initial recovery phase could fail and become headwinds to growth.

China has room to manoeuvre, but prefers supply-side stimulus

China has leeway (both fiscal and monetary) to support growth. But the authorities’ emphasis on supply-side measures – while being reluctant to provide more demand-side stimulus – seems increasingly out of place, especially since China does not have an inflation problem. The last Politburo meeting mentioned tax cuts and refunds, as well as policies to help small and medium-sized businesses (to support employment, and therefore consumption), but that almost feels like an afterthought. on infrastructure investments. What would it take for the authorities to reconsider? Did the services PMI drop below 40 in May?

Renminbi depreciation, implications

Chinese growth concerns weigh on the renminbi – The offshore spot exchange rate weakened a further 52 basis points this morning. The rate of depreciation may seem small compared to changes in the prices of other assets. However, the renminbi is the anchor for several other emerging market (EM) currencies (first and foremost in Asia, but not only), and weak exchange rates these days often mean unwanted inflationary pressures. . We’re keeping an eye on the next batch of China’s monetary and credit aggregates next week for signs of stabilization in the housing sector – it’s a well-known fact that housing prices have an impact on consumer confidence. Stay tuned!

Chart at a Glance: China Activity Gauges – Heading in the Wrong Direction

Chart at a Glance: China Activity Gauges - Heading in the Wrong Direction

Bloomberg LP

PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

The information presented does not imply the provision of personalized investment, financial, legal or tax advice. This is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Certain information may be provided by third party sources and, while believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. All opinions, projections, forecasts and forward-looking statements presented herein speak as of the date of this communication and are subject to change. The information contained herein represents the opinion of the author(s), but not necessarily that of VanEck.

Investing in international markets involves risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve increased risks related to the same factors as well as increased volatility, lower trading volume and less liquidity. Emerging markets may have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

Any investment is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that the investment objectives will be achieved and investors may lose money. Diversification does not guarantee a profit or protect against loss in a declining market. Past performance does not guarantee future performance.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.