Monthly Economy Report

China, August 2016

By Anthony Lawry

Trade data for August showed an unexpectedly higher positive trend as exports and imports surged upward. While exports still ended up being 2.2 percent lower than a year prior, they did so at a much lower level than anticipated (4 percent) as predicted by economists and financial analysts. Furthermore, imports rose by 1.5 percent on year in August coming in much higher than Reuter's 4.5 percent decline forecast. This is the first time Chinese imports have risen in two years.

Additional and more indirect economic indicators also pointed to better than expected Chinese economic data. The Australian dollar, often viewed as a proxy of Chinese economic stability considering the economic ties between the two countries, rose against the US dollar to $0.7683 from $0.7677 largely in the reaction to the slew of economic data. While these numbers point to an overall easing of China's slowdown, the overall trend of lower growth remains a continuous development. In spite of this, there are a number of positive signs in the economy that point to an overall strengthening of the Chinese economy.

All the recent August data comes a few weeks after ratings agency Moody's Investor Service increased Chinese gross domestic product (GDP) growth forecasts for the rest of 2016 from 6.3 percent to 6.6 percent and for 2017 from 6.1 percent to 6.3 percent. Senior Moody analyst Madhavi Bokil suggested that China's economy will in general continue to gradually shift from exports to consumption in what has commonly been referred to as a 'soft landing', further suggesting that "We do not expect China to exert a significant drag on global growth prospects over the rest of 2016 and 2017."

Over the past few years, China's overall GDP growth numbers have gradually lessened from highs of up to double digit GDP growth per year down to a 25-year low in 2015. Analysts are speculating that the increase in GDP figures are partially a result of Beijing-mandated stimulus packages and programs which they further contend could very well increase in the coming months. While this may pile onto an already problematic credit/debt issue, continued government-sponsored capital inflows have largely been responsible for China's economic resilience since the 2015 summer market crash.

Inflation data also hinted at further stabilization of China's overall macroeconomic health. August consumer price inflation numbers eased to its weakest pace in nearly a year somewhat caused by lessening foodstuff prices, yet a decrease in consumer price deflation altogether contributed to growing confidence in the steadying of the overall economic picture. In spite of the flurry of recent positive data, there are still rising price compressions. Furthermore, the real pressing issue with China's overall economic picture still is not about problems concerning inflationary forces, but rather the aforementioned credit-related tensions, particularly at the provincial and corporate levels. A Goldman Sachs report recently indicated that China's debt service ratio was around 20 percent—a figure higher than expected—and the debt-to-GDP ratio is as high as 240 to 270 percent. Yet in spite of these figures, not all is to despair (it should be noted that US credit-to-GDP ratio is well over 300 percent). That is to say, credit/debt remains a somewhat opaque issue.

Although these numbers seem ominous, there are many signs to indicate China's slowdown may finally be subsiding if not substantially at least slightly. A number of analysts, such as Nicolas Veron of the Peterson Institute for International Economics, believe that the policies are much more aligned in China than they are in the West for a debt restructuring system or reformation project needed in order to allow for alleviation of debt pressure building in the provincial and private sectors. In the West, debt restructuring is always a taboo subject frequently the target of investor's ire and disillusionment with the potential of capital losses. This is not the case in China where debt restructuring has taken place a number of times such as in the 1990s when a number of state-owned enterprises were going through a transitionary modification and overall restructuring that initial public offerings required.

In short, the 'debt problem' is not so much a problem rather than a challenge in the way of Chinese officials waiting for expertise and effort to be put into it for increased mitigation. While there may be much noise surrounding debt restructuring, other issues remain such as the overall global macroeconomic environment not conducive for peripheral and emerging market growth. Nonetheless, China's economy is still subject to the ebbs and flows of existential forces such as global macro-economic conditions and even geopolitical dilemmas. It will be up to the leadership to be able to take on these problems and work with private and provincial leaders to continue the monthly grind of continued recovery from what should be seen as an eventual overall economic easing.

---END---