Conclusion: Consistent with prior Hedgeye research, Chinese leading indicators indicate a forthcoming slowdown in economic activity in China.
The Conference Board’s Leading Economic Index for China was revised lower today to 0.3% from the prior report of 1.7%. The key change in the data was the calculation of Total Floor Space Started. Originally this data was reported to have contributed 1.3 percent, but was revised lower to negative -0.1% in April.
In April three of the six components that make up the LEI increased. These positive contributors were: PMI supplier delivery index, total loans issued by financial institutions, and the raw materials supply index. Conversely, the three components that declined in April were: consumer expectations, the PMI new export order index, and the total floor space started (as noted above).
With April’s gain, the six-month annual growth rate of the leading economic indicators continue to moderate, down to 3.3% (a 6.8% annual rate). This is a marked deceleration from the prior six months period, which grew 4.9%, or 10.0% on an annualized basis.
Clearly, we are starting to see evidence of the Chinese government’s cooling measures, and that the second derivative of Chinese growth has peaked. The question remains: Is this priced in?
On June 10th, we wrote a note that concluded, “China is starting to look interesting on the long side, as the stock market has priced in slowing economic growth.” Based on the price action over night in China, the Shanghai Composite was down over -4%, the answer seems to be clear.
The combination of the downwardly revised leading indicators and the fact that the Agriculture Bank of China (the third largest lender in China) capped its IPO at a lower than expected range (signaling lower demand for Chinese equities than expected), suggests that Chinese equities are still better for sale.
Daryl G. Jones