As A China Bear, I Was Wrong... I WASN'T BEARISH ENOUGH

It’s official now, the Chinese economy did not bottom out in the first quarter, and the latest data confirms just how badly the economy is doing (or just how too optimistic the market has been).

While I am bearish on China and did not think the worst was over for the Chinese economy, I did think that the slowdown has stabilised a bit in the late first quarter, and will probably have another leg down later this year.

The latest data suggests, however, that even China bears like myself could be wrong for being not bearish enough: the short-term stabilisation I was looking for has stayed much shorter than I thought it would, and the data from April have basically been all bad. The only good news appears to be that inflation is trending down, so inflation pressure is much less of a concern when the government is trying to implement pro-growth measures.

With uniformly bad data in China, I don’t think we can rule out monetary easing in the near future, although timing of such moves would be difficult to predict.  Monetary easing will be in the form of cutting reserve requirement ratio, and interest rates cut on the lending side cannot be ruled out, while cutting deposit rates seems to be somewhat less likely.  But again, cutting RRR will not automatically translate into better loan growth.  As I have stressed that loan growth are more demand driven than supply driven.  With slowing economic growth, businesses are less likely to borrow even credit becomes available.  Also, we have to pay attention to trade surplus and capital flow, as cutting RRR could be more of a measure to offset the loss of liquidity due to narrowing trade surplus and capital outflow.

Here’s a round-up of just how ugly some of these April macro data look.

Official manufacturing PMI: Actual 53.3 vs Expected 53.6 (also note just how the manufacturing PMI diverged from the actual industrial production figures in the charts way below).


Exports growth: Actual 4.9% yoy vs. Expected 9.1% yoy, Imports growth: Actual 0.4% yoy vs. Expected 12.5% yoy.


Industrial production growth: Actual 9.3% yoy vs. Expected 12.2% yoy  (note the divergence with PMI)


Fixed asset investment growth: Actual 20.2% yoy vs. Expected 20.4% yoy


New Loans: Actual RMB681.8 billion vs. Expected RMB 780 billion


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