The Shanghai Composite fell nearly 3% on Monday and the yuan continued its decline. This comes on the back of some disappointing economic data from China.
First, we saw Chinese exports in February unexpectedly plunge 18.1% year-over-year. Economists have warned about the impact of the Lunar New Year holiday on exports in the Jan-Feb period, which often causes exporters to front load into January.
This time around, the export numbers were also distorted by fake trade data which inflated last year’s export figures, creating a higher base effect.
That being said, some economists emphasised that external demand still looks soft.
Societe Generale’s Wei Yao thinks the correction we saw in February is finally bringing the year-to-date data in line with what we’re seeing out of Korea and Taiwan, indicating a “weakened momentum of global demand entering 2014.”
“Even if excluding exports to Hong Kong (-20.9% yoy) from calculation so as to adjust for the over-invoicing problem last year, export growth would still have been a meager 2.4%,” she writes.
Meanwhile, Jian Chang and Jerry Peng at Barclays point out that export orders sub-index of the PMI report has been down for three straight months.
Second, we saw credit data deteriorate in January. New bank loans fell to 654 billion yuan in January, from 1.32 trillion yuan the previous month. It was also below expectations for 730 billion yuan. Total social financing fell to 939 billion yuan, from 2.58 trillion yuan the previous month and missing expectations for 1.31 trillion yuan.
Societe Generale’s Yao has previously warned that the government’s efforts to “engineer a deleveraging could lead to a hard landing in China, if the policy response is misjudged.”
That being said, some economists like Bank of America’s Ting Lu expect this data to pick up in March.
Third, Chinese consumer prices were up just 2% year-over-year, slowing from 2.5% increase in January. Meanwhile producer prices were down 2%, accelerating from last month’s 1.6% decline.
While cooling inflation does give the People’s Bank of China room to ease liquidity, some are worried about a deflationary threat considering producer prices have been down for two years.
We have previously pointed out that while some economists see this as an indicator of “the deflationary excess capacity in the system,” others think it is a sign of weak domestic demand.
Finally, there’s the default of the 11 Chaori bond, the first-ever domestic bond default in China. While this news was expected, it only adds to concerns surrounding Chinese growth.
While the default is a good thing in that it will help better price bonds and other debt products, many are worried about the short-term implications. This suggests that China is not going to back-stop financial products that are about to default.
“If a default indeed occurs (especially on principal), we believe that the market will have reached the Bear Stearns stage (when the market started to seriously re-assess subprime debt risk),” wrote Bank of America’s David Cui in a note to clients.
“We doubt that the financial system in China will experience a liquidity crunch immediately because of this default but we think the chain reaction will probably start.”
Barclays’ Jian Chang and Serena Zhou think the systemic risk from the default is small but “expect more but selective defaults, more risks to be exposed, and greater financial market volatilities this year.”
Again, it’s not the idea that a financial collapse is imminent, but that the cogs are now in motion.
That’s a lot of news for markets to digest, and data in March should provide a slightly clearer picture. For now concerns are mounting about China’s ability to reach its 7.5% growth target.
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