China's credit stimulus adds another layer of support for the global growth

China reported its usual monthly macro statistics today. In October, industrial production grew 4.7% from a year ago, while retail sales expanded by 7.2%. Both data points were below consensus expectations.

Commenting on the events, Daniel Casali, Chief Investment Strategist noted:

“A key message from China’s economy is that domestic demand there appears relatively healthy, a factor that has not necessarily been captured in headline statistics. For instance, Alibaba’s “Single’s Day” shopping sales, the world’s largest e-commerce event, reported revenues of $38bn on the 11th November. This was up 26% from 2018 and is growing far more rapidly that the headline government retail sales measure. Alternatively, outstanding household loans (a proxy of future demand) grew 13.5% from a year ago, faster than the overall rate of the economy and suggests that the Chinese consumer accounts for an expanding proportion of overall GDP.”

“Looking forward, China has stepped up the supply of bank loans and direct financing (e.g. equity and bond issuance) flowing through the financial system. Over the past 12 months, this credit measure has risen by 1.4% of GDP, against a contraction of 5.7% in the summer of 2018. Given that credit is a typical lead indicator, we see potential upside for the Chinese and global economy.”

“There is evidence of faster Mainland demand growth feeding through to the rest of the world. First, the global manufacturing PMI has picked up for the third consecutive month in October, supported by China. Second, the BDI Baltic Exchange Dry Index, a measure of the price shipping companies charge for transporting freight, has more than doubled from its low point this year in February and is a good omen for global trade to pick-up. This is now apparent in EU export to China, which are up 5% on last year, against a 7.8% contraction at the end of 2018.”

“As major central banks like the US Federal Reserve and European Central Bank ease monetary policy, financial markets are beginning to discount the impact of accelerated Chinese credit stimulus. Global equities are up more than 20% year-to-date and continue to rally. Bonds are also beginning to sell-off, as the global economic recovery strengthens. In short, additional Chinese credit provides insurance that the global business cycle can be extended into 2020.”

^{Source: Refinitiv, Bloomberg, Smith & Williamson Investment Management LLP (data correct as of 14th November 2019)}

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