China GDP surprise, scepticism abounds

China’s headline real GDP number has unfortunately done very little for increasing investors’ trust in the National Bureau of Statistics.

Yuan
Source: Bloomberg

One could argue that GDP did grow at 7% in Q2 with the large contribution of financial services associated with the big rally in the stock markets, but you would then have had to see a corresponding decrease in the Q3 number. The 6.9% Q3 GDP print really just makes one question the veracity of both the Q2 and Q3 numbers. It’s hard to be overly optimistic about the headline number, especially given the range of other data released today. Industrial production for September undershot at 5.7%, while nominal GDP came in at 6.2%.

Nonetheless, markets have clearly been buoyed by the better than expected headline number, and it shows that China’s economy has not deteriorated as much as some had thought. Asian markets and currencies saw a strong surge on the data. The Aussie dollar in particularly saw a massive algo driven spike on the release, rising 0.7% immediately on the release. This was mirrored in a range of other Asian currencies, and also saw the Japanese yen lose some of its strength.

Although Asian equity markets initially rallied on the news, it was more muted than the equity markets and looked to give back a lot of these gains in the afternoon session. Futures for European and US markets were also declining after an initial rally.

Chinese rebalancing is at a pivotal moment. Should it fail the global economy, it could be pushed into a major downturn. China needs to keep retail sales growth steady at +10% year-on-year expansion with monetary and fiscal stimulus measures starting to halt the decline in investment.

Although growth may be holding up in national headline figures, North and Northeast China are basically having a regional recession with their heavy exposure to commodities and over-capacity secondary industries. How China lessens some of the strain it is suffering is still an open question for the government.

China’s provincial and local governments are far more constrained in their ability to access credit. The local government financing vehicle (LGFV) has been outlawed and the extant LGFV debt is slowly being reissued as provincial government bonds. Chinese banks have been forced to buy these provincial bonds at far higher values than their potential risk warrants. These developments serve to constrain the avenues for provincial and local government funding in two ways: 1) the old LGFV debt has to be issued as provincial bonds before new funding can be gained through these avenues; 2) Chinese banks are less likely to grant new credit because they have had to sacrifice a large amount of their balance sheet buying expensive and risky provincial bonds.

ASX

Speculation around a rate cut by the Reserve Bank of Australia (RBA) has been quickly gaining pace since Westpac announced its rate increase on property loans. The RBA’s Financial Stability Review noted 'growing risks' in the property market and that there is the 'possibility of a downturn in some apartment markets'. These concerns were given further credence over the weekend as Sydney’s auction clearance rate dropped to 66.6%, its lowest since December and a marked slowdown from 90% only a few months ago. Expectations for an RBA rate cut by December have now reached 80%. Given this growing easing bias, the likelihood of the Aussie returning to 0.75 or even 0.74 before the year is out seems unlikely, barring some really disastrous US data.

The ASX had a pretty choppy day after selling off quickly in the morning, then rallying on Chinese GDP, only to start to sell off again in the afternoon session. Materials, arguably the most China-affected sector, continued to see heavy selling throughout the day even after the GDP number.

Treasury Wines (TWE) surged 11.3% after they returned to the market after a capital raising to purchase some of Diageo’s US assets. Westpac also had a good performance as they returned to the market after their own capital raising, rising 3%.

Gold miners sold off relatively sharply today with Evolution Mining -64%, Regis Resources -5.4% and Newcrest Mining -4%.

Metcash has had a bit of a bounce of late as shorts have been taken off it, but it started moving down again today losing 3.5%.

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