China’s growth will rebound this quarter
Credit to Author: Peter Lundgreen| Date: Fri, 13 Dec 2019 17:41:48 +0000
The macroeconomic data from China has been surprisingly positive lately, particularly that the private manufacturing sector signals progress, which was quite unexpected. The Caixin Manufacturing Purchasing Managers Index (PMI), which primarily covers the private sector, showed an increase to 51.8 points in November, which in fact, is the highest reading in the past three years.
It corresponds well with the PMI measured by the National Bureau of Statistics of China, which covers the large Chinese corporations in China. In November, this PMI index moved up to 50.2 points from 49.3 in the prior month, which in itself is a fairly large jump. A reading above index 50 suggests that the sector is expanding, whereas a reading below 50 points indicates contraction in the sector.
The fact the official PMI for the non-manufacturing sector rose from 53.7 points in October to 54.4 points in November is very encouraging, though the service sector in China continuously expands. I find that the upward move in the manufacturing sector is the interesting part of the current growth story that we should dive into.
In that context, it always makes sense to check how the global development is, where the major part of other economies also spurred some improvement in their respective manufacturing PMI indices in November. It means that it’s not an isolated Chinese improvement, but a global expectation within the sector. But the Chinese improved their reading more than many, and it was also supported by higher domestic demand. Given that the United States–China trade war remains unsolved, then the growing optimism might surprise slightly.
Given the pressure on gross domestic product (GDP) growth in the third quarter this year, I have been very excited about what initiatives the Chinese central government will come up with. It’s worth to mention that this challenge is certainly not an isolated Chinese issue, as growth shrinks around, though it doesn’t give solace to the Chinese central government, so it has to select its action.
The cement production in China has gone up from 210 Mio. tonnes in June to 218 Mio. tonnes in October, despite declining housing prices during the same period. How surprisingly strong the demand for cement is can be illustrated by the price increases for construction materials. The rumors say that the price for cement has gone up about 15 percent during the past three months, and the price on steel bars used for construction, is also up.
Obviously, there is something going on in the construction sector, but on the national accounts, any increase in public infrastructure investments are not visible yet. Although the provinces have been allowed to issue debt from the 2020 borrowing facilities that are meant for infrastructure investments in toll roads, ports, railways, among others.
All in all, I argue that it seems very plausible that the central government in Beijing has, as a first step to support the growth during this quarter, returned to the good old adage of “building more infrastructure.” Since the announcement of the soft third quarter GDP growth number, I have been pretty excited about what the answer would be.
The infrastructure solution is one of the least attractive options because China is running out of healthy infrastructure projects to build. It means that infrastructure spending increasingly risks to return a negative yield, which is the economic expression for an unattractive public investment that should be avoided.
These kinds of investments just keep the economy running, but do not develop or move the economy forward. Though Beijing can still manage to introduce new reforms, where I am watching out for any kind of tax reform aimed at the private households. I trust that the Chinese government is sensible enough to work in that direction as well.
In my view, the initiatives will also have a direct effect on the Chinese stock market, where I very often get the question, how much will the Chinese stock market jump if the US–China trade war comes to an end? It, of course, depends on many factors, but right now, I judge that it will jump seven pct. more than the global stock market. But if the Chinese GDP growth once again includes too much hot air due to the mentioned infrastructure investments, then investors will hold back. Currently, there is an increasing risk that too much unhealthy infrastructure investments will offset the positive effect in the Chinese stock market should the US and China find a way to terminate the trade war.
Peter Lundgreen is the founding chief executive officer of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. He is an international columnist and speaker on topics about the global financial markets.