The difficulty in reading China’s market

Reading Time: 3 minutes

chinastockmarketContradictory data recently released on the Chinese market speaks volumes for how difficult accurate forecasts are in the world’s second largest economy. For many, they might as well be reading hieroglyphics.

By Rafa Galan del Rio

First of all, rumours hit the Chinese market on May 31 that worse-than-expected official Purchasing Managers’ Index (PMI) figures were on the horizon, which caused investor sentiment to dip and result in drops in Europe. However, data released by the China Federation of Logistics and Purchasing, a state-run industry association, on May 30 showed that the manufacturing sector actually continued to expand in a trend that has been ongoing for the past eight months.

This was then quickly crosschecked. Data released by HSBC that exhibited a contraction on its preliminary report earlier in May was confirmed on June 3, which indeed confirmed the first deterioration the Chinese market has experienced for the past seven months, according to the bank’s research. Criticisms over the difference between these two varying analyses have been remarkable and forceful.

There are multiple reasons why market data is so complicated to tune to accurate settings in China. High dynamism in the Chinese economy makes it difficult to provide analysis steeped in veracity even for the short term. Furthermore, there is a lack of historical experience collecting statistics in China, a country that only began experimenting with its unique form of capitalism in 1989 after former helmsman Deng Xiaoping opened up the previously closed communist nation.

Almost daily, economists around the world analyse in detail Chinese data, as well as market players, who pay much more attention to its rise, using manufacturing data as barometer to gauge an important impetus beyond the perceived global recovery.

Surveys are now being conducted on different types of Chinese companies, with the last such research performed on relatively small exporters, while the government tracks enterprises more focused on the domestic market.

By looking at the medium or long term, all GDP forecasts made a few years ago by international organizations, investment banks or research institutes failed. In a way, they were somewhat pessimistic for the future, even when none of them predicted the global crisis in 2008.

The second largest world economy has grown at an annual average rate of 10 per cent in the last decade, outperforming almost all countries in the world. However, China recently posted Q1 growth of 7.7 per cent, now outpaced by the Philippines for the first time in history.

Rapid development in the Chinese economy has been based on investment, basically infrastructure and housing. Debt has also being increased, including shadow banking, which is something that now worries most China watchers.

In addition, analysts show concerns that this growth model is not sustainable anymore; that could be realistic. But again, maybe analysts underestimate the potential that private consumption might have in the coming years with a middle class that will likely increase exponentially. Even net exports have not substantially contributed to the growth in the last years.

If predictions failed in the past, there is no way to ensure that they will be right in the future. Of course, there are currently downside risks and structural changes that need to be done. An aging population might affect future growth, but the scenery can change completely if the “one-child policy” is abolished in some form, for example.

During the past year, fear of an economic hard landing was put in place every time less-than-favourable data was released. The reality is that it did not happen and most probable will not happen in the future. Recently, both the IMF and OECD have cut their growth estimates for this year, but still remain above government expectations.

Double-digit GDP rates will not be seen anymore, but there is still huge potential for the country to keep expanding at a reasonable pace in the future. Not to mention the fact that such economic development, in absolute terms, has never been seen before in any country. In this context, it is reasonable to acknowledge the difficulty involved in predicting the final result.

To converse with the author about this article contact him on Twitter (@_perpe_) using the hashtag #investvine

 

 

 

 

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Reading Time: 3 minutes

Contradictory data recently released on the Chinese market speaks volumes for how difficult accurate forecasts are in the world’s second largest economy. For many, they might as well be reading hieroglyphics.

Reading Time: 3 minutes

chinastockmarketContradictory data recently released on the Chinese market speaks volumes for how difficult accurate forecasts are in the world’s second largest economy. For many, they might as well be reading hieroglyphics.

By Rafa Galan del Rio

First of all, rumours hit the Chinese market on May 31 that worse-than-expected official Purchasing Managers’ Index (PMI) figures were on the horizon, which caused investor sentiment to dip and result in drops in Europe. However, data released by the China Federation of Logistics and Purchasing, a state-run industry association, on May 30 showed that the manufacturing sector actually continued to expand in a trend that has been ongoing for the past eight months.

This was then quickly crosschecked. Data released by HSBC that exhibited a contraction on its preliminary report earlier in May was confirmed on June 3, which indeed confirmed the first deterioration the Chinese market has experienced for the past seven months, according to the bank’s research. Criticisms over the difference between these two varying analyses have been remarkable and forceful.

There are multiple reasons why market data is so complicated to tune to accurate settings in China. High dynamism in the Chinese economy makes it difficult to provide analysis steeped in veracity even for the short term. Furthermore, there is a lack of historical experience collecting statistics in China, a country that only began experimenting with its unique form of capitalism in 1989 after former helmsman Deng Xiaoping opened up the previously closed communist nation.

Almost daily, economists around the world analyse in detail Chinese data, as well as market players, who pay much more attention to its rise, using manufacturing data as barometer to gauge an important impetus beyond the perceived global recovery.

Surveys are now being conducted on different types of Chinese companies, with the last such research performed on relatively small exporters, while the government tracks enterprises more focused on the domestic market.

By looking at the medium or long term, all GDP forecasts made a few years ago by international organizations, investment banks or research institutes failed. In a way, they were somewhat pessimistic for the future, even when none of them predicted the global crisis in 2008.

The second largest world economy has grown at an annual average rate of 10 per cent in the last decade, outperforming almost all countries in the world. However, China recently posted Q1 growth of 7.7 per cent, now outpaced by the Philippines for the first time in history.

Rapid development in the Chinese economy has been based on investment, basically infrastructure and housing. Debt has also being increased, including shadow banking, which is something that now worries most China watchers.

In addition, analysts show concerns that this growth model is not sustainable anymore; that could be realistic. But again, maybe analysts underestimate the potential that private consumption might have in the coming years with a middle class that will likely increase exponentially. Even net exports have not substantially contributed to the growth in the last years.

If predictions failed in the past, there is no way to ensure that they will be right in the future. Of course, there are currently downside risks and structural changes that need to be done. An aging population might affect future growth, but the scenery can change completely if the “one-child policy” is abolished in some form, for example.

During the past year, fear of an economic hard landing was put in place every time less-than-favourable data was released. The reality is that it did not happen and most probable will not happen in the future. Recently, both the IMF and OECD have cut their growth estimates for this year, but still remain above government expectations.

Double-digit GDP rates will not be seen anymore, but there is still huge potential for the country to keep expanding at a reasonable pace in the future. Not to mention the fact that such economic development, in absolute terms, has never been seen before in any country. In this context, it is reasonable to acknowledge the difficulty involved in predicting the final result.

To converse with the author about this article contact him on Twitter (@_perpe_) using the hashtag #investvine

 

 

 

 

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