While the world gasped last night when China’s production-based, and goalseeked GDP number came in at 7.0% – the lowest in 6 years…
.
Plunging consumer sentiment: oddly this hasn’t been offset by China’s unprecedented stock bubble.
The worst retail sales in 9 years:
Tumbling auto sales:
The weakest fixed asset investment (recall that in China capex spending accounts for over half of GDP growth) in the 21st century
Industrial production worse since the Lehman crisis:
And of course, home prices:
Which brings us back to China’s “7.0%” GDP. Because as Cornerstone Macro reports, “Our China Real Economic Activity Index Slowed To Just 1.6% YY In 1Q.”
The indicator in question looks at many of the components shown above, such as retail sales, car sales, rail freight, industrial production, and several others, to determine an accurate indicator of the true state of China’s economy.
It finds that not only is China’s economic growth rate not rising at a 7.0% Y/Y rate, but is in fact the lowest it has been in modern history!
And a 1.6% growth rate by what was formerly the world’s most rapidly growing (and largest according to the IMF) economy explains perfectly what happened with the US economy over the past 6 months. Hint: it has nothing to do with the winter, and everything to do with China hard landing into a brick wall.
* * *
Ok, so China’s economy is cratering yet its stock market is the best performing in 2015 in dollar terms (Russia may be the only exception). How does one reconcile these two seemingly incompatible concepts?
The answer is simple, and GaveKal’s note today, titled Slumping Growth, Booming Market, touches on it.
The equity market’s performance has been driven mostly by the government’s policy response, rather than by the economic data. While economic growth has continued to weaken, Chinese stock markets have enjoyed the biggest rally since 2007, with a huge run-up in the domestic A-share market, which has now spilled over to Hong Kong. The flows last week were especially heavy, forcing the Hong Kong Monetary Authority to intervene in the currency market to offset huge capital inflows—despite a big gain in the US dollar. A strong US dollar usually means a weak Hong Kong stock market, but the relationship has broken down because this time Chinese funds, rather than global investors, are driving the bull run.
Actually it’s much simpler than all that. As we explained over a month ago, “QE In China Is Now Inevitable.” The Pavolovian algos are merely frontrunning it.
Which, incidentally is good news. Because once China also goes all in, and nobody else is left, then the real fun begins.
