Within China’s comically static Q2 GDP release last week was an apparent slowdown in China’s manufacturing sector. While GDP held steady at +6.9% year-over-year growth, the sector decelerated from its Q1 cycle-peak of +14.2% year-over-year to +12.7% year-over-year in the Q2 of 2017.
While this seems trivial, the manufacturing sector’s trailing twelve month contribution to broader Chinese economic growth remains at an historically unsustainable rate of 46.5%, versus a trailing 10-year average of 34.8%, writes Hedgeye Senior Macro analyst Darius Dale.
The sector’s recent strength was fueled by the People’s Bank of China, which pumped a staggering net 1.727 trillion Chinese yuan into mainland financial markets in 2016. This year, PBoC Open Market Operations are down -246% year-over-year. So expect the Chinese manufacturing sector to continue to fade alongside Beijing stimulus.
Investing implications? We say sell Metals & Mining stocks (XME). China consumes about half the world’s production of refined copper, iron ore, aluminum and smelted and refined nickel.
