Are Fresh China Worries Real?

The shocking decline in Chinese exports yesterday may have been partly due to Lunar New Year holidays but it raises fresh questions. In a classic risk-off pattern, the yen was the top performer while the Canadian dollar lagged. In light of the turn in markets, we recap what we know about the Chinese economy.  There are currently six  Premium trades in progress, one of which 1 is short a major equity index.

As shocking as the headline is, a 20.6% y/y decline in Chinese exports isn't always cause for concern. The country essentially shuts down for Lunar New Year and because the holiday hits at different times, the data can be difficult to adjust.

What makes this time so worrisome is that exports were also down 6.6% in the prior month in numbers that also badly missed expectations. If the trend continues in March, there are serious risks that something is amiss.

But we don't want to wait another month to assess.

Here is a sampling of recent data:

- Feb official manufacturing PMI 49.0 vs 49.4 prior

- Feb Caixin manufacturing PMI 48.4 vs 48.4 prior

- Jan new loans 2510B vs 1900B yuan exp

- Westpac MNI China consumer sentiment 111.3 vs 114.9 prior

There is a major risk that the data is manipulated but at face value, there is nothing screaming that the economy is especially suffering. Much of it can be explained by slower global demand and a shift towards a consumer-led economy.

What argues for worry are actions from officials and signs from markets. The RRR was cut Feb 29 and the Shanghai Composite is down 44% since June. Perhaps the most worrying signal is that officials on the weekend signaled fresh lending in housing.

I wrote yesterday about the positive side of the renewed growth-at-all-costs mentality but the flip side is that it may be a sign of desperation. In an opaque economy like China, good information is difficult to find and what market participants believe is happening is more important than reality.

If fresh doubts about China arise, the ECB disappoints and the Fed is surprisingly hawkish next week, the recent gains in risk assets could quickly evaporate.

In the hours ahead, continue to watch for headlines from the NPC. Given the rebound in Shanghai stocks yesterday, the only signal that market is providing is one that officials are intervening.