China Sees Lower Growth, Higher Stock Prices

Despite indicators of a continually cooling macroeconomic environment, Chinese stocks continue higher, even as disinflation and weak factory activity signal continued weakness.

Despite indicators of a continually cooling macroeconomic environment, Chinese stocks continue higher, even as disinflation and weak factory activity signal continued weakness.

Inflation in China slowed in October despite stimulus from the country’s Central Bank, according to new data released by the National Bureau of Statistics. The government body reported producer prices continue to see deflation, falling 5.9% on a year-over-year basis in October. Producers have seen deflation for 44 months in a row, indicating weakness in investment and manufacturing in the country’s economy even as official data says the country is seeing near 7% year-over-year GDP growth.

Meanwhile, consumer prices are growing at a lower rate on a year-over-year basis, indicating weak demand throughout the country’s growing middle class that is putting pressure on retailers who cannot raise prices against strong aggregate demand.

Consumer prices rose 1.3% year-over-year in October, indicating weak purchasing activity throughout the country and in strong contrast to official indicators of domestic demand-driven growth. The weakness is also in the face of six interest rate cuts in the past 12 months by the PBOC and an aggressive attempt to spur credit-driven consumption throughout China.

NBS statisticians attribute the weakness in the CPI to the weather, suggesting that this created a bounty of fresh produce in October. With higher supplies of agricultural products, the NBS contends, there is limited room for price growth throughout the country.

However, cheap vegetables do not explain the weakness in the Chinese manufacturing sector, which contracted for three months in a row in October. In that month, the official purchasing managers’ index stagnated at 49.8, indicating that manufacturing is shrinking.

The competitiveness of China’s manufacturing sector is also at risk because of a strengthening yuan despite recent attempts at devaluing the currency. Earlier this year, the PBOC and Chinese Communist Party announced reforms to make the yuan a more international currency that would strengthen against other currencies, causing the renminbi to United States Dollar rate move from 6.1997 to 6.4029. However, the exchange rate has since weakened in favor of the yuan, which is now trading at 6.3615 versus the dollar.

Economists debate to what extent that decline is a result of weak foreign demand and how much is due to weak domestic demand, but China’s stated and unstated goal of shifting to an economy driven by domestic demand seems to be stalling as it fails to driving manufacturing to increase.

Despite a short-term small decline in the Shanghai Composite Index, Chinese stocks remain far above their 2015 low, having recovered by over 24% since their lowest point since late August. The Shanghai Composite Index is also up over 47% year-over-year, providing the strongest investment returns of any major equity or debt market in the world.