Today, we received what was the latest in a string of directionally positive economic data out of China. Specifically, the JUN credit growth data confirms what we already knew: a multi-month string of fiscal and monetary policy “mini-stimulus” efforts have successfully stabilized the slope of Chinese economic growth. Not surprisingly, Chinese equity ETFs have performed fairly well on that catalyst (3M performance):
- iShares China Large-Cap ETF (FXI): +8.8%
- Guggenheim China Technology ETF (CQQQ): +9.4%
- Global X China Consumer ETF (CHIQ): +0.1%
- Global X China Financials ETF (CHIX): +7.3%
- EGShares China Infrastructure ETF (CHXX): +5.7%
Digging into the weeds, aggregate financing accelerated materially in JUN on a sharp acceleration in deposit growth and shadow credit formation. Both are in line with the easing of fiscal and monetary policy over the past 3-6M and the former should continue to ease as we progress through the year (deficit spending out of Beijing tends to be back-half loaded).
This should come as no surprise to our subscribers, as we’ve literally been harping on this very point for the past two months. Refer to the following research note for more color on this topic, as well as for incremental color on the key takeaway of this note.
- BOOKING RESEARCH ALPHA IN CHINA; TURNING NEGATIVE (5/14): http://app.hedgeye.com/feed_items/35479
- CHINA TO IMPLEMENT QE? (6/2): http://app.hedgeye.com/feed_items/35872
That key takeaway is very simple: don’t extrapolate recent data as something that resembles China turning the corner from a domestic demand perspective.
Specifically, the monetary policy guidance out of the PBoC would suggest that the bulk of the easing we’ve seen the Chinese money markets in recent months is now rear view mirror – especially with credit growth running so hot of late (this was the fastest pace of credit formation in any JUN since 2009!).
That should weigh on the outlook for fixed asset investment – particularly in the property sector, which remains a complete disaster (PRICE, DEMAND and FINANCING are all tending resoundingly negative amid positively trending SUPPLY). Moreover, Chinese credit formation (and headline GDP growth) tend to be skewed toward the first half of the year anyway. Add tougher GDP compares to that mix and you have what is a reasonably sound argument for rates of Chinese growth to peak here in the mid-summer.
It’s worth nothing that we’re not calling for Chinese economic growth to tank in 2H14, nor do we see its obvious financial risks materializing in a meaningful way over the intermediate term. With CPI running well below the State Council’s +3.5% target in the YTD and a conservative sub-2% deficit/GDP ratio, Chinese authorities have plenty of scope to meaningfully ease monetary and fiscal policy in an effort to stave off anything resembling a crisis.
Moreover, we think the threat of crisis is precisely why we don’t think they’ll waste their “bullets” on a likely marginal deterioration in economic conditions in 2H14. As our proprietary EM crisis risk modeling work continues to suggest, the Chinese financial system is rife with tail risks.
We’ll cross that bridge when we eventually get to it. For now, trade your China exposures accordingly.
Associate: Macro Team