China is in Trouble, But is it Finally Time to Go Bargain-Hunting? PMI Data Eyed

China’s economy is in shambles, but chipper PMI data may excite bargain-hunting traders.

• China’s economy remains in a dire state amid a dearth of demand
• Assorted stimulus efforts have struggled to make a lasting impact
• November PMI data may be a trigger for bottom-fishing investors

China has struggled to rebuild momentum after the world’s second-largest economy belatedly emerged from “zero Covid” lockdowns. Two years on, efforts to speed up the recovery have mostly fallen flat. That leaves a thorny challenge to be solved for Beijing officials. From the markets’ vantage point however, the stock of bad news may be close to spent.

The nature of the underlying problem has been well-understood. For six consecutive quarters, nominal gross domestic product (GDP) growth in China has lagged real growth, which has been adjusted to factor out inflation. This points to a negative coefficient on prices, which speaks to economy-wide deflation.

China’s economy is stuck in an anemic state

Under normal circumstances, demand for goods and services bids up prices as would-be consumers compete for supply. If prices are falling, this implies an absence of demand. Put simply, the economy at large is on discount to entice would-be bargain hunters to clear inventories.

China’s policymakers have tried to break the gloom with bold doses of monetary stimulus. Economy-wide interest rates and bank reserve requirement ratios have been cut and a slew of inducements have been unveiled, from lower down-payments for homebuyers to debt relief for municipalities and cash injections into the stock market.

This has not helped. The Bloomberg Credit Impulse gauge measuring the share of new loans in GDP has dropped to the lowest since December 2018. The contribution from credit growth fell for a ninth consecutive month in October, shrinking at a blistering rate of 14.5% year-on-year. That’s the fastest since February 2022.

Meanwhile, global investors are fleeing. Foreign direct investment has been dropping since June 2023, with the rate of collapse accelerating to historic levels. A staggering drop of 29.8% year-on-year was recorded in October. Scarier still, this marked a second month of improvement after a recent peak in the pace of outflows at 31.5% in August.

Chinese PMI data may lift the Australian dollar and copper

All this is hardly new for market participants however, which raises an important question: how much more pain is yet to be accounted for in China-sensitive asset prices before bottom-fishing speculators are inspired in earnest? This will be front-and-center as the government’s official purchasing managers index (PMI) data is released this week.

Economists’ forecasts point to modest improvement in the pace of manufacturing sector growth in November while the prior month’s modest expansion is matched on the services side. Nevertheless, the overall picture envisioned by these outcomes would remain barely discernible from standstill if expectations are broadly met.

Analytics from Citigroup suggest that China’s economic data outcomes now tend toward upside surprises relatively to consensus forecasts. If this foreshows stronger PMI figures, a rebound in markets considered proxies for China’s business cycle – like copper and the Australian dollar – may be triggered.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro. 

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.