A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

August 3, 2015

The 7% wonder of the world
China GDP and Business Cycle Signal

chart

Source: Bloomberg, as of 7/29/15. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • China recently reported that its GDP grew 7% over the past year—spot on the official forecast.
  • Yet other economic data has been notably weak—leading many investors to wonder if that 7% figure will hold up over time.
  • The China Business Cycle Signal for June—a leading indicator compiled by China's National Bureau of Statistics—is down 31% from a year ago and tied its July 1998 record low of 60.7.1
  • China's manufacturing PMI has shown contraction for five straight months, and for seven of the past eight. The latest reading was 48.2 for July, the lowest in over a year.2
  • What's more, corporate profits were just reported to have fallen on a year over year basis.
  • China's government has responded with aggressive measures, including four interest rates cuts since November and increased construction spending. Some analysts expect even more cuts in the months ahead.
  • Investors, of course, have much at stake in evaluating China's true trend rate of growth, since it affects so many other economies and markets, including commodities and emerging markets. 
  • It may well be that upcoming economic data allays investor concerns about maintaining a 7% growth rate.  Absent that, however, expectations will likely be recalibrated on an ongoing basis – which could mean more volatility, but also an opportunity to find values in sectors that may overcorrect due to China uncertainties.

The chart:

  • The chart shows year over year GDP growth on a quarterly basis and the Caixin-Markit China Manufacturing Purchasing Managers Index (PMI) over the past three years.
  • GDP growth has slowed to 7% this year from nearly 8% in 2013.
  • At 48.2, the PMI is the lowest since April 2014—the last three times in bottomed occurred at levels of 48, 47.7 and 47.6 in March 2014, July 2013 and August 2012 respectively.

1Source: Bloomberg as of 7/29/15
2Source: Bloomberg, as of 7/27/15


Definitions:

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The Caixin-Markit China Manufacturing Purchasing Managers Index (PMI) measures the manufacturing sector of the Chinese economy. PMI greater than 50 indicated economic expansion; below 50, contraction.


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