4 double-edged growth signs China must watch out for

Exports growth plunged 1% and China must brace itself for the consequences.

According to DBS, identifying the reasons for the economic slowdown helps to formulate the correct policy prescription. China’s slowdown is driven by sluggish external demand and deceleration of fixed asset-investment.

Here's more from DBS:

The former situation is involuntary but the latter one is an intended policy outcome. Headwinds on the external front are incessantly repeated in news reports/opinion columns. To repeat again, China’s exports and imports have fared poorly, coming in at just 1.0%/4.7% in July versus 10.5%/6.4% in 2Q.

In particular, exports to the EU contracted by as much as 16.2 % in July. Export and import growth are projected to be little changed for August at about 2.8% and 3.7% respectively, putting the trade balance at USD 29.7bn. 

Industrial production came in below 10% (very rare in the past decade) over April-July and it is expected to be 9.3% in August. This also paints a very dire picture for exports in the months ahead. The primary economic weakness is clearly in the exports related to the manufacturing sector, and that naturally calls for a weaker currency.

As a result, 0.7% depreciation of the RMB YTD is a logical policy response. Moderate periodic depreciation will not lift exports noticeably but justifications for near term appreciation are scarce.

There are contradictory signs emerging from all fronts in the Chinese economy. To summarize, positive growth signs include (1) property prices/volume have already rebounded for three straight months; (2) retail sales in real terms have improved; (3) fixed asset investment growth is holding up and will likely rebound and (4) loan growth is actually not that weak. The weaknesses are clearly skewed towards the export and manufacturing sectors captured well by trade/IP/PMI figures. Is this the end of the world? The answer is no.