Is the Chinese Economy improving?

Based on the latest data coming out of China the answer would be ‘yes, probably’. Today the Chinese National Bureau of Statistics reported that Foreign Direct Investments in July grew by 24% compared to the same period a year ago. That was faster than in June and also considerably higher than expectations, according to Bloomberg data. Although the FDI numbers are notoriously volatile, data look much friendlier now than a couple of months ago.

Interestingly, foreign investments from Europe showed yet again a healthy growth, paced by Germany which increased its investments by a hefty 58%. Investments from the US increased 11%. China aims to lure more FDI in advanced manufacturing to help move its industry make more sophisticated, high-value products. It has recently stepped up efforts to attract more investment into high-end services including logistics, research and development and education.

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Yesterday, it was announced that the preliminary, or Flash, Manufacturing PMI for China, published by HSBC and Market Economics, rose to 50.1 in August. The actual HSBC/Markit PMI number will be published on September 1st, but if it follows the Flash estimate the PMI will rise above 50 for the first time in four months. Traditionally the PMI data have been a pretty reliable indicator of future Chinese economic growth developments.

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The next chart shows the ‘Li Keqiang’ indicators, named after the current premier of the People’s Republic of China, who, in the past, revealed that the GDP numbers itself are (partly) ‘man-made’. Instead, Li Keqiang looks at the growth of electricity production, freight traffic (especially by train), and domestic credit. As can be derived from the chart, both growth in electricity production and freight traffic have been picking up lately. This is not the case for domestic credit, which cannot be a surprise given the measures the central government has taken to shore up the banking industry.

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This last point is important as it will probably hamper a really significant uptick in Chinese economic growth. The Chinese banking industry, including the shadow banking sector, has grown disproportionally in relation to the economy. The government has stepped up its efforts to clean up the financial sector which will have a negative effect on economic growth.

That does not take away that recent macro-economic data have come in better than expected (see graph below) and point to some improvement in the Chinese economy. For now I think the slowdown of the Chinese economy could have ended somewhere this quarter.

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