The latest data out of China will give those expecting a soft landing pause about China’s economic situation. While inflation has come down somewhat of late, so too have industrial output and capital investment. The April industrial production figure was the most worrying as we saw slowest annual expansion in nearly three years. Moreover, according to Reuters, growth in capital investment slowed to the lowest in nearly a decade.
Now, these growth numbers are still robust by western standards. For example, China reported the growth in industrial production in April slowing to 9.3% y-o-y from 11.9% and retail sales growth slowing to a still robust 14.1% y-o-y from 15.2%. But it is the direction of the change and the magnitude of that move which is alarming.
Moreover, loan growth is weakening too, so the private credit accelerator cannot drive forward GDP growth. New loans actually fell 8% y-o-y in April after rising 49% y-o-y in March. M1 and M2 growth are moving lower in concert with these numbers. Reuters reports that M2 money supply growth has come down to 12.8%, which is already below Beijing’s 14% target.
To date China has tried to work against this by easing the reserve ratio requirement and by lowering interest rates. It hasn’t worked. My expectation is that a lot of fiscal stimulus will be pulled forward to meet the weak private credit growth and output numbers with countervailing government expansion. Whether this prevents a hard landing we don’t know. But at a minimum, I expect the numbers to continue to weaken for the next month of two before any stimulus can kick in.
From an emerging markets perspective this is significant as we have already seen poor April data from Brazil, India, Taiwan, Korea, and Chile. Reports from the FT indicate that Argentine growth is also collapsing. Asia, in particular, will be impacted by negative feedback with China.
Bottom line: Emerging market growth is slowing. For investors looking for a place to hide in EM equities or sovereign and corporate credit, risk is now increasing globally and that means sticking to non-cyclicals even in these markets and avoiding sovereigns with enhanced credit risk like Argentina. In my view, Mexico is looking good in all of this, despite the drug cartel problems that dominate the news headlines. The macro fundamentals there are still comparatively strong.