Not So Fast on the Cyclical Chinese Recovery

November 14, 2019
By Bryce Coward, CFA in Economy, Markets

This morning investors were unfortunately treated to a rather disappointing package of October Chinese economic data. Three of the most important hard data series were reported: fixed asset investment, industrial production and retail sales. Each was lower than the previous month and missed expectations, suggesting the downward slide in Chinese growth continues apace. Fixed asset investment growth fell from 5.4% to 5.2% vs expectations of 5.4%. Industrial production growth fell from 5.8% to just 4.7% vs expectorates of 5.4%. Retail sales growth fell from 7.8% to just 7.2% vs expectations of a rise to 7.9%.

What’s more, these data pushed our Chinese Nominal Industrial Activity Proxy to a three year low of just 3.1% growth. Notice in chart one the tight correlation between the Nominal Activity Proxy and Chinese Nominal GDP. Nominal GDP growth, more so than real GDP growth, is vitally important in China due to the large amounts of debts that need to be serviced in nominal CNY or USD or EUR.

Chart two shows how our Chinese Nominal Industrial Activity Proxy is simply a less volatile version of the China Markit PMI, suggesting sizable downside in the next China PMI reading.

Chart three relates our Chinese Nominal Industrial Activity Proxy to the US Markit PMI. The down tick in our Chinese Nominal Industrial Activity Proxy suggests the US manufacturing sector may not be out of the woods just yet.

What would be the logical reaction to another few months of deteriorating PMIs in China and the US if it were to occur? Lower long bond yields of course. And no, it’s not a crowded trade. Chart 4 shows the commercial trader (smart money) positioning in 30-year bond derivative contracts as a percent of open interest. The smart money traders are long the largest amount of 30-year bonds since just before 30-year rates plunged from 3.25% to 2%.

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