All the talk of a US-China trade war is drowning out what really matters for investors.
China’s economy is slowing.
The backstory here is pretty simple. In January 2015, the People’s Bank of China pumped 1.235 trillion yuan into the economy. The cumulative knock-on effects of all this stimulus unleashed trillions of dollars into the global economy. Chinese “secondary industries” (i.e. heavy industry, construction, etc.) exploded from below 10% of GDP in 2016 to nearly 50% of incremental GDP in China.
To counter a particularly bubbly housing market in China, the PBoC and fiscal authorities significantly dialed back these unprecedented easy money policies in 2017. The effects are already impacting Asian economies, equity markets and commodity markets around the globe. Chinese “secondary industries” have already slowed from 50% of GDP in China to 40% in 1Q18.
Here’s the big picture takeaway: A centrally planned slowdown of this magnitude has never been attempted before in modern economic history.
So, in the spirit of “Throwback Thursday” we’re revisiting our #ChinaSlowing institutional research note from 7/17/2017. Written by Senior Macro analyst Darius Dale, this note basically helps explain why the Shanghai Comp is down -5% year-to-date and -11.5% from its 2018 peak.
Dale covers the massive 2015-2016 Chinese economic stimulus in granular detail and lays out the investing implications. (CLICK HERE to read this entire complimentary institutional research note.)
Here’s a key quote:
“The key takeaway for investors here is that the monetary policy impulse in China is negative on both a trending and YoY basis, which is something that should weigh on growth within the credit-sensitive manufacturing sector of the Chinese economy,” Dale writes. “Much like it was on the positive side throughout 2016, we are keen to call investors’ attention to this factor as a leading indicator for broad-based economic softness going forward.”
The point is if you want to understand where China is going you need to understand where it’s been. While we’re not calling for collapse in China, it is safe to assume the glide path down will be a lot less linear than Beijing hopes.
We encourage you to read Dale’s research note from 7/17/2017.
It will illuminate our research process and get your wheels turning about the significant investing implications of #ChinaSlowing.
(Click here to read this complimentary research note.)