Chart of The Week: Economic Activity in China Continues to Slacken

Despite steady growth in official GDP, there is mounting evidence that China is slowing yet again. Since peaking at a four-year high of 7% in July last year, our CMI 2.0 has fallen every month. It ended the first quarter of the year at 5.9%.

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In 2014, Fathom warned of an increased risk of a hard landing in China. Within two years the pace of growth in China had dropped two-thirds from 6% to 2% — according to our measure of economic activity, the China Momentum Indicator (CMI 2.0). Against consensus at the time, we asserted that this slowdown was happening despite the lack of progress in rebalancing the economy towards private consumption. The Chinese authorities stepped in before long, ‘doubling down’ on pursuing credit-fuelled investment and export-led growth, turning on the fiscal and monetary taps again as they struggled to restore growth.

Fathom’s measure of economic activity in China peaked last July at 7%. It has fallen every month since then, ending the first quarter of the year at 5.9%. But a switch to consumption-led economy remains a distant dream — real retail sales growth, one of the ten indicators used to construct CMI 2.0 was just shy of a seven-year low in March. And although officially authorities remain focused on deleveraging, last month’s cut in the quantity of reserves banks must hold relative to their liabilities, a monetary loosening, suggests (short-term) growth is still being prioritized, at whatever cost to the long-term outlook. But China has already doubled down once. Its return on investing in unproductive assets has already diminished and will continue to do so from here. This, combined with a lack of reforms to encourage consumption, is why we forecast that CMI 2.0 will fall further, averaging 5.7% this year and 5.1% in 2019.

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