- Chinese GDP continues to power ahead in 2017, but make sure to look under the hood
- Money supply, new credit growth all shooting up, despite significant existing debt
- Following Party Congress, few reasons to expect Chinese help for the Australian dollar
Earlier today, China reported Q3 GDP figures, industrial growth and retail sales figures. All the data either met expectations (6.8% GDP growth) or beat them (10.3% retail sales growth vs. 10.2% expected, 6.6% industrial growth vs. 6.2% expected). Looking at 2017, the Chinese economy continues to perform well thanks to the rebounding fortunes of ‘Old China’ sectors such as heavy industry, infrastructure and transportation.
However, a deeper look at the drivers of China’s economic growth suggests a less rosy picture. In the first nine months of the year, money supply grew by 9.2%. Credit issuance in Q3 is up an amazing 23% year-over-year, far above GDP growth. Despite the narrative of ‘deleveraging’, overall money supply and credit continue to surge. While a short-term debt boom is usually manageable, China is suffering from an unusually heavy debt load for an emerging market. Earlier in the year, the International Institute for Finance’s calculations showed that debt to GDP in China has surpassed 300%. The large stock of existing debt and fast growth of new debt suggests that these trends are unlikely to persist.
Policy takeaways from the 19th Party Congress
At the recent 19th Party Congress, President Xi Jinping’s remarks were mostly in line with previous expectations. He re-affirmed the country’s commitment to ‘supply side reforms’ (emphasizing the need to reduce capacity), while stressing the need for more market-based resource allocation. He also devoted an unusually long amount of time to the issue of environmental protection, calling for the creation of a new ecological supervision agency.
Short-term and long-term implications for AUD
For Australian dollar investors, the most interesting part of Xi’s speech is what wasn’t said. Unlike previous speeches, President Xi did not expect GDP to double in five years. Instead, he emphasized the change from high-speed to high-quality growth. He outlined two phases: developing China from a “moderately prosperous society” today to a “modern” country between 2020 and 2035. In the next phase between 2035 and 2050, he expects China to develop into a “great modern socialist country”. In the longer term Xi’s rhetoric suggests lower investment in ‘Old China’ sectors, meaning less demand for Australia’s commodity exports.
In the short-term, the major concern for Aussie investors is that economic growth has probably peaked in the third quarter. Similar to previous instances of the Party Congress, China’s economic performance was likely to have been stage-managed to ensure economic stability. This was also an issue that affected the USD/CNY exchange rate, seeing how the Chinese yuan appreciated prior to the event (see below).
Now that the Congress has been concluded, markets should expect money supply and new credit to fall in rate-of-change terms. Support for the Chinese yuan, which costs China its foreign reserves, is also likely to fall. As can be seen in the graph below, AUD/USD tends to closely track the fortunes of USD/CNH (inversed). With Chinese growth and support for the yuan likely to fall from here, the recent good fortunes for AUD should also reverse. All in all, there is limited good news for the Aussie following the event.
AUD and CNH: heavily correlated