July 20, 2018

News in Charts: Chinese Momentum Slows to a 15-Month Low

by Fathom Consulting.

Fathom’s measure of China’s economic activity, its CMI 2.0, continued its descent in May, slowing to a 15-month low of 6.2%.

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Below the official estimate of GDP growth, which was 6.7% in the second quarter, the widening wedge between Fathom’s measure and the official measure is increasingly reminiscent of the gap that emerged in late 2013 – 2015.

Back then, just as they are now, the Chinese authorities used monetary stimulus to support short-term growth, repeatedly cutting banks’ reserve ratio requirements while denying that the economy was materially slowing.

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Currency depreciation was also used to cushion the downturn, a tool that may have been used again in recent weeks — in line with Fathom’s prediction as shown in the final chart below.

While it remains to be seen which direction China’s policymakers take in terms of growth strategy — doubling down or rebalancing — one thing is certain, both are fraught with difficulties.

Indeed, as we have highlighted to clients previously, past episodes of rebalancing by emerging market economies are associated with stalling economic growth for an average of two years. And, after that initial impact, average annual GDP growth tends to be 1.6 percentage points weaker than its pre-rebalancing trend rate.

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