As we probably all expected, it looks like numbers coming out of China are surprising to the upside.
In fact, analysts are beginning to project a very strong recovery for Chinese growth next year based on their models for consumption growth. That said, as economist Michael Pettis points out (see below), “these were the same models that predicted earlier this year that 2020 GDP growth rates would be close to zero or substantially negative. “ Time for a pinch of salt?
Charles Robertson, Global Chief Economist at Renaissance Capital is certainly not into pinches of salt looking at PMI and export numbers by contrast.
A note out today entitled ANOTHER “BEST FIGURE IN 10 YEARS FROM CHINA“, looks at this week’s China PMI figures .. “with the headline PMI again (like last month) being the best figure in a decade .. and beating 51.5 expectations.”
“ And new export orders too are also, again, the highest for a November in a decade (same story a month ago)”.
Charlies conclusion ?
“ Aside from confirming that the world’s second largest economy is going gang-busters, the new export orders are also encouraging as they suggest that the November lockdowns in Europe and increased restrictions in part of the US, are not impacting on global demand. Good news”.
Beijing-based American economist Michael Pettis takes a suitably more restrained view in his latest Global Source update from the week before last.
Noting that most economic models projecting economic growth are output models,
“they do not work in China, where GDP is an input measure, not an output measure. China’s GDP growth will be determined as a political consideration, and so lower-than-normal growth in consumption and business investment was automatically matched this year with higher growth in local-government infrastructure spending and real estate development. Next year we should expect the opposite. That is why these models underestimated GDP growth earlier this year and will almost certainly overestimate next year’s growth.
“The key determinant of next year’s GDP growth rate, in my opinion, will be the outcome of the persisting debate between those in Beijing more worried about rising debt and those more worried about slowing growth. Depending on who is in the ascendance, I expect GDP growth next year to be either in the 6-7 percent range or in the 7-8 percent range. Given the deterioration this year in every measure of debt sustainability, I suspect it will be the former, especially if the current bond market turmoil persists.”
India by contrast has had a bad Covid crisis and has suffered from some shocking economic numbers – even worse than the UK – but it looks like the worst may now be behind it. In a note out this week from Lalcap, a London based research firm, India’s National Statistical Office
“released data that showed that the second quarter GDP (July -September 2020) contracted at a slower pace of 7.5% compared to a precipitous slump of 23.9% in the quarter before from April – June 2020. The latest reading pushes Asia’s third-largest economy into its first technical recession in records going back to 1996. However, the latest GDP figure shows a very sharp rebound from the record 23.9% contraction in the previous quarter. This suggests that the economy is on a recovery path and may possibly even show growth from the third quarter covering October – December.”
One interesting side note on debt in the Lalcap note – it’s another measure suggesting the worst may be over.
“Credit Suisse said in its ‘India Corporate Health Tracker’ report published this month that corporate stress level fell to its lowest in five years in the quarter ended September, led by a recovery in metals and telecom sector. The share of debt among stressed Indian companies across sectors, which have an interest cover ratio of less than one, has reduced sharply from 56% to 35% in the July-September quarter of fiscal ending March 2021. An interest cover ratio of less than one indicates that a company cannot comfortably meet its immediate interest payment obligations due to poor cashflow. “Post Covid-19, incremental stress on corporate India appears limited and this is also reflected in the recent commentary from bank managements as well as rating agencies highlighting limited demand for restructuring in the corporate segments,” Credit Suisse said in the report. The share of debt with loss-making companies also fell to 23% from 28-30% pre-Covid, the report said.”
Last but by no means least, I could not mention the inevitable reversal in digital currencies.
Quelle surprise !
It was inevitable I suppose but as James Butterfill’s, Investment Strategist at CoinShares, notes in his Digital Asset Fund Flows report today, after suffering outflows in Bitcoin investment products totaling US$3m,
“flows then bounced back with an inflow of US$48m on Friday bringing the week’s total flows to an inflow of US$198m. This suggests the investment market saw the weakness in prices as a buying opportunity, shrugging-off the regulatory fears. We believe the weakness in the US dollar has supported the inflows into Bitcoin investment products, as investors look for an anchor while fiat currencies continue to be debased by central banks. Fund flow data from gold investment products unusually highlight outflows during this dollar weakness. Although it is hard to find direct evidence, the flows data may suggest that investors are rotating out of gold and into Bitcoin. Volumes last week were 150% above the year daily average, trading at US$5bn a day on trusted exchanges”.
I have to say that I am not quite so confident that we are, in reality, seeing meaningful outflows from gold into digital currencies, nor do I think we are teetering on the edge of a bitcoin blow up. Price action was way too bullish and it needed to take a breather.