China: Economic sentiment has soured - Westpac

Richard Franulovich, Research Analyst at Westpac, explains that sentiment on China has soured in recent weeks, weaker data, tighter financial conditions and a debt downgrade all playing their part.

Key Quotes

“While there’s no doubt that China faces a herculean long term structural adjustment negativity around the near term outlook may be overdone.”

“For one, a simple model of Chinese industrial production, taking lagged values of real interest rates, the real effective exchange and total social financing does not yet signal a downturn. On the contrary, our simple IP model continues to point to accelerating growth.”

“Real interest rates have indeed risen but that is offset by a real effective exchange rate that has been on a clear depreciation track of alte. After falling 6.1% last year, China’s CFETS basket is down another 1.6% year to date. Against that an unweighted basket of the nine major East Asian currencies (excluding JPY) is up 3.8% year to date, having fallen 1.5% in 2016.”

“Total social financing is overstated and has arguably peaked but +9.3% annual growth as of April has typically been associated with reasonably decent IP trends. The back up in Chinese interest rates has arguably run its course for now too, the 5yr bond rate having reversed lower in recent sessions.”