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Trading  | July 16, 2018

Following the largest contraction in ‘shadow banking system’ credit, and a record low for M2 growth, fears were building that China’s economic growth prospects may lag expectations.

By way of background for tonight’s economic data deluge, here are the lowlights.

The drop in shadow bank was particularly sharp for the second month in a row: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in June

the lass granular M2 reading also posted a growth slowdown, rising only 8.0% in June, down from May’s 8.3%, below consensus of 8.4%, and the lowest on record.

Both of which do nothing to help China’s credit impulse. Investors see China’s liquidity tightening…

Commenting on the ongoing slowdown in China’s credit creation, Goldman said that the latest money and credit data highlighted the challenges the government is facing in loosening monetary policy.

But before we shift to the market’s perceptions, don’t forget, China’s trade surplus with the US just hit a Trump-tantrum-creating record high…

Oh, and don’t forget, Chinese stock markets have tumbled…

And bond markets have collapsed as defaults surge…

And Yuan has plunged…

So the big picture was not rosy heading into tonight’s big data deluge.

Early signs for June pointed to weakness. The official and Caixin PMIs indicated a slowdown in momentum – with export order gauges weakening.

China stocks were down, Yuan flat, and China 10Y bonds 3bps lower in yield as the data hit.

And this is what the data looked like..

  • China Q2 GDP YoY MET EXPECTATIONS rising 6.7% – equal to the weakest since Q1 2009 (against expectations of +6.7% but slowing from Q1 growth of 6.8% YoY)

  • China Retail Sales YoY BEAT rising 9.0% (against expectations of +8.8% and notably up from May’s 8.5% YoY – the lowest since May 2003)

  • China Industrial Production YoY MISS rising just 6.0% – weakest since Dec 2015 (against expectations of +6.5% and well down from May’s 6.8% YoY)

  • China Fixed Asset Investment YoY MET EXPECTATIONS rising 6.0% – the lowest on record (against expectations of +6.0% and down from May’s 6.1% YoY – record low)

Visually – down and to the left…

Not pretty. It is clear that momentum in the world’s second-largest economy is slowing amid deleveraging and intensifying trade friction with the US…

Though there is one silver-lining, as Bloomberg’s Enda Curran notes, the rebound in retail sales is noteworthy as it’s an indicator of confidence in the wider economy. Granted it was from a low base in May, but it shows that consumer confidence is holding up, despite the trade tensions – although auto sales are down 7% YoY (and petroleum is up 16.5% YoY). Also bear in mind that retail sales print is likely flattered by the fact that the yuan tumbled over 4% from end May through June.

In case those charts look a little odd to you, they do to us too… and amid the world’s craziest decade ever in terms of monetary policy experimentation, extremes of leverage and debt, nuclear armageddon proximity, and now global trade wars, somehow, China has managed to crush all uncertainty out of its business cycle…

It’s almost as if they rigged it?!

In many respects today’s numbers are already history (with most analysts expecting China to have an overall ‘OK’ first half of the year), it’s the second half that will be tougher.

Huatai Securities estimated in a report over the weekend that if the U.S. implements its tariff plan on $200 billion of Chinese imports, China’s exports growth should decrease by 0.8 percentage point and GDP growth by a quarter percentage point.

Finally, as a reminder,  if investors are hoping for China to reflate its way back out of this, Chinese billionaire Zhang Baoquan has a warning (via iFeng: 张宝全:中国人缺乏投资工具 把不动产当硬通货)

China now has two ‘bombs’, one ‘bomb’ is a real estate bubble and the other is a local debt. Any explosion to the Chinese economy is devastating.


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