Key Takeaway: Recent data confirms our view that the Chinese economy is in the early stages of what we believe to be a moderate, but impactful deceleration through at least YE ’17. In the context of “Old China” now growing at an unsustainable rate post the 2016 stimulus package and property price appreciation running double the growth rate of disposable personal incomes, we see little coming down the pike that could shake our conviction in this view.

Over the weekend China reported the preponderance of its key high-frequency data for the month of APR and there was noticeable hue of slowing amid the releases:

  • Retail Sales: +10.7% YoY vs. +10.9% prior
  • Industrial Production: 6.5% YoY vs. +7.6% prior
  • YTD Fixed Assets Investment: 8.9% YoY vs. 9.2% prior

China Has Officially Inflected - China Retail Sales YoY

China Has Officially Inflected - China Industrial Production YoY

China Has Officially Inflected - China Fixed Assets Investment Growth

The slowdown in investment was perpetuated by an inflection in private sector activity, while the slowdown in production was telegraphed by the inflection in electricity consumption and the continued retrenchment in PMI data which was released earlier this month.

China Has Officially Inflected - China Private FAI

China Has Officially Inflected - China Electricity Consumption YoY

China Has Officially Inflected - China Manufacturing PMI

China Has Officially Inflected - China Non Manufacturing PMI

China Has Officially Inflected - China Composite PMI

As we’ve appropriately anticipated in our recent work on China, the slowdown in Chinese economic growth is, in large part, being perpetuated by a concomitant tightening  of fiscal and monetary policy, which is combining to squeeze credit growth at the margins. Specifically:

  • The growth rate of Fiscal Expenditures slowed to +4.0% YoY in APR vs. +25.4% in MAR.
  • The PBoC injected a net +280B CNY into the banking sector via its Open-Market Operations in APR. While up from the -720B CNY net withdrawal last month, the 3MMA of -377B CNY is well shy of the TTM trend of +7B/month. Moreover, OMO liquidity provision is tracking down -241% YoY on a YTD run-rate basis.
  • The PBoC injected a net +44B CNY into the banking sector via its Medium-Term Lending Facility in APR. That’s down from +303B CNY in MAR and the 3MMA of +179B CNY is well shy of the TTM trend of +243B/month. Moreover, MLF liquidity provision is tracking down -22% YoY on a YTD run-rate basis.
  • Money Supply (M2) growth slowed to +10.5% YoY while Total Social Financing growth slowed to +1.39T CNY (vs. +2.12T prior) as the confluence of tighter interbank liquidity and a well-publicized regulatory crackdown weighed on the growth rate of nontraditional (a.k.a. “shadow”) financing. Indeed, shadow banking accounted for only 12.7% of TSF in APR, which was down from the 24.6% average recorded in JAN through MAR.

China Has Officially Inflected - China Fiscal Expenditures YoY

China Has Officially Inflected - PBoC Open Market Operations Net Liquidity Provided

China Has Officially Inflected - PBoC Medium Term Lending Facility Net Liquidity Provided

China Has Officially Inflected - China M2 Money Supply YoY

China Has Officially Inflected - China Total Social Financing MoM

All told, recent data confirms our view that the Chinese economy is in the early stages of what we believe to be a moderate, but impactful deceleration through at least YE ’17. In the context of “Old China” now growing at an unsustainable rate post the 2016 stimulus package and property price appreciation running double the growth rate of disposable personal incomes, we see little coming down the pike that could shake our conviction in this view.

China Has Officially Inflected - China Secondary Industries as a   of Nominal GDP Growth TTM

China Has Officially Inflected - China Property Prices 1st Tier Cities

China Has Officially Inflected - China Property Prices 2nd Tier Cities

China Has Officially Inflected - China Per Capital Disposable Personal Income Growth

China Has Officially Inflected - China Real GDP Estimates

For more details behind our bearish outlook for the Chinese economy, please review our 4/25 note titled, “China: Not Terrible, But Not Good For Reflation Either”.

Lastly and unrelated, tomorrow we’re hosting our third annual Hedgeye Cares charity golf tournament in an effort to raise support for the underserved youth of neighboring Bridgeport, CT. If there anything you can do to contribute to the cause, please shoot us an email. Many thanks for your consideration.

Kind regards,

DD

Darius Dale

Managing Director