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Checking In On China - Signs of a Slowdown

July 9, 2021

China has been prominently featured in the news lately – but what are the underlying economic trends beneath the headlines telling us? Catch our newest TrendsTalk episode with ITR Senior Forecaster Connor Lokar to learn more.



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Transcript by Rev

Connor Lokar, senior forecaster here at ITR Economics, joining you for another TrendsTalk. Today, we're checking in on China. China is highly topical these days I would say, it's really seemed like every day I open up the Wall Street Journal or really any publication, it seems that China's grabbed a top headline more often than not. Recently it's items like general regulatory crackdowns, supply chain issues, pursuit of their own digital currency, crackdowns on other major cryptocurrencies like Bitcoin, for example. Some stories about a warming relationship with China and Russia, perhaps a cooling relationship between the United States and China.

But there's really been almost nothing in terms of just fundamental economic analysis. And I think there's some interesting things happening beneath some of those headline items. I mean, those headlines, they make nice window dressing, but I want to peel back the curtain and talk about what we're seeing in some of the data, because I think it's interesting. Starting at the core, we'll looking at China industrial production. That's probably the best way to evaluate the overall Chinese economy and growth is starting to cool. We're starting to see that consistently here in recent months. Month over month growth on a month over month basis peaked earlier this year, very early, January, February, 2021. And we've actually seen monthly rates of change descending over the last four months.

Data for May, the most recent month of data available for China, was up 8.8% in terms of Chinese industrial production compared to May 2020, in a vacuum, still. Healthy growth rate, almost 10%, fairly typical for China, but the beginning of a cyclical shift seems to be afoot. We also see tentative softening in the China 3/12 rate of change, that quarterly growth rate, which for us at ITR, it's a bit more stable and reliable in terms of checking point evaluation. And this is generally on time with our forecast for the Chinese economy to reach a cyclical peak in the latter portion of 2021, which will be early relative to our expectations for most other mature industrial economies, that we anticipate is going to have some upward momentum into early 2022. More on that in just a little bit.

And the leading indicator front, when we look at predictive data points for China, we see ongoing declines in the China leading indicator, in the China business confidence index, in the China purchasing managers index rates of change. All of which indicate this tentative slowdown in China industrial output is poised to continue through the remainder of 2021 and into the first half of 2022. I'll also add to that list, we are seeing rate of change decline in both China power generation and China railway freight volume. Those are a couple of favorite metrics of ours at ITR, when you tackle the challenge of cutting through the noise, I'll call it, associated with evaluating and the challenge evaluating the Chinese economy. Both of those data sets also are multiple months into decelerating trends, respectively.

Now, just beyond some of the leading indicators if I look at more, I guess what I would call coincident or just different industry benchmarks within the Chinese economy, different sector looks, we see deceleration there as well and some pretty big ones I might add. When we look at China crude steel production, decelerating. China residential and non-residential building starts, decelerating. China exports to the United States are decelerating, which I find especially interesting given the red hot demand presently in the United States. It's also interesting that China overall exports are still in phase B, they're accelerating, but China export to the U.S. are sharply decelerating right now, relative to early 2021 growth rates. Kind of curious. Also we see some very tentative deceleration in China automobile production as well.

All of this matters folks. I mean, after the United States, China is the second largest economy on Earth and far and away exceeding Japan in the third slot and any other Western European economy that help round out much of the rest of the top 10. And they're also the largest consumer, not the second largest, but typically largest consumer of most raw materials on this planet. So this is a slowdown is notable. It carries some possible implications. For one, slowdown in China and perhaps some of that raw material consumption could facilitate some, maybe even needed cooling in some of the intense inflation pressure at the raw material level that we've seen so far this year.

In fact, I think we're already starting to see it. If we look at our friend, Dr. Copper, as we look at copper futures prices, they have actually been descending for the better part of the past few months, which and we call it Dr. Copper, perhaps a preview indicator for some eventual commodity pricing relief, maybe at points in the second half of this year, certainly possible or likelier in 2022 in some other commodities or perhaps even energy pricing trends. Easing domestic demand in China could also free up maybe some of those materials or finished goods for export as opposed to satisfying domestic Chinese demand, which may alleviate some of the supply side stream as well.

So definitely an interesting shift. And I think all of this is particularly interesting, as China's timeline relating to COVID-19 is much different than really the rest of the world. Obviously as we know, as a point of origin, China was, I keep referring to this to first in, first out. First into the pandemic, first out of the pandemic, so to speak and into that post COVID-19 recovery. So it certainly makes sense that China might now be first into, or starting to wait into first into that slowing portion of the business cycle, which I think is a likely preview of what we're going to see in North America in most European nations, Japan, elsewhere next year, that's our ITR's forecast is for.

Some of that early 2022 business cycle peaks on industrial production basis for most of those economies. So China poised to hit that perhaps inside the goalposts of 2021, later this year. So for now, slowdown the Chinese economy, it's barely perceptible, which is fair. So we haven't seen it discussed much, but I'd expect that to change in the second half of this year. So keep your ears up, keep your eyes open. If you start to see those stories, remember you saw it here on ITR TrendsTalk first. Perhaps we'll have a follow up for you later this year or maybe in early 2022. So thanks for checking in. See on the next one.


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