Data indicator after data indicator has missed to the downside in recent weeks, continuing a trend established in the first quarter of 2015.
Nathan Lim, portfolio manager at fund manager Australian Ethical Investments, points to three other indicators – those that are not as widely recognised within markets – that show risks for the Chinese economy continue to be on the downside.
- Electricity usage
- Tax receipts
- Freight costs
Our China indicators are largely either directionless or weakening. However, three indicators we track have heightened our risk assessment for the region. First, electricity usage for the February/March period was up only 0.9% versus the same period last year. This is well off the mid-single-digit growth it had held for some years. Admittedly the connection between electricity usage and economic growth has diminished over the past few years. China has pivoted its economy away from direct investment and manufacturing, so the slower growth rate is not as alarming as it seems. Second, tax collections for the February/March period were unchanged versus the same period last year breaking its longstanding trend of solid mid-single-digit growth. The absence of growth is more disturbing because it suggests China’s transition is leading to an economic contraction. Thirdly, and most alarming to us, is shipping rates between China and its main trading partners is plummeting. The Shanghai Shipping Exchange freight index has fallen nearly 17% since mid-February and is now at levels not seen since 2011. The glut in global shipping capacity is already well known in the market so the sharp fall in rates cannot be explained solely by overly zealous shipping executives. In the context of directionless manufacturing indicators, falling electricity usage, and shrinking profits falling shipping rates points to poor demand conditions. Said differently, there is too much supply because China is demanding less as its economy might be stalling. We still assess China as “Neutral” but see rising risks to the downside.
Here’s a recent chart of the Shanghai Containerised Freight Index, that which Lim describes as “most alarming”:
Economic data out of China this week includes April new home sales prices today along with the ‘flash’ manufacturing PMI gauge for May from HSBC-Markit on Thursday.
Given near-unilateral weakness in the data so far this month, risks appear slanted to the downside.
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