As many investors are aware, China which is considered as the second largest economy, has a huge impact on developed markets.
The recent volatility being experienced over the past months was primarily contributed to the fact that economic data from China was deteriorating which also triggered a revision in the forecast figures that the economy will fail to sustain its annual growth in GDP of 7 per cent.
Surprisingly enough, over the past weeks the nation released some improving figures which did trigger a positive sentiment within markets across the board.
In fact, the trade picture in China for the month of March, noted a remarkable turnaround in terms of exports with dollar denominated exports rising by 11.5 per cent, thus recovering from a 25.4 per cent slump hit in February.
In absolute terms, year-on-year exports increased to $160.86 billion, its first gain since June 2015. In terms of market expectations, analysts were expecting an increase of 2.5 per cent.
Despite the remarkable increase, one must highlight the fact that partly of the increase should reflect the seasonal upturn after the Lunar New year holiday.
Looking for the movements in exports over the past two months, i.e. from the end of January to March 2016, exports dropped by 9.6 per cent. Interestingly but clearly acceptable when considering the current political turmoil, is the remarkable decrease in exports towards Brazil which declined by 47.2 per cent.
Other notable outliers were ASEAN countries which decreased by 13.7 per cent and South Korea which depreciated by 11.2 per cent.
Imports in China dropped by 7.6 per cent year-on-year to $130.9bn in March of 2016, less than market expectations of a 10.2 percent decline. It is the 16th straight month of contraction, as a result of declining commodity prices and weak demand. From January to March 2016, imports decreased by 13.5 percent year-on-year.
Turning at the latest PMIs, improvements were also evident as the halt in expansion which was experienced since July 2015 was terminated with the PMI coming in at 50.2 in March, up from the 49 level recorded in February.
While non-manufacturing PMI came in at 53.8 in March, up from 52.7 in February. That points to continued expansion in the services sector. The relatively resilient services sector continues to offset slowing manufacturing.
This morning China issued its GDP figures, in which the economy expanded 6.7 per cent on year in the first quarter, slightly slower than the previous quarter’s 6.8 per cent. The figures were in line with analysts’ estimates.
The boost in stimulus seems to have triggered some sort of improvement. Lately the PBOC has lowered interest rates six times since November 2014 as well as slashing the reserve requirement ratio (RRR) for banks, while the central bank's last action was in February, when it reduced the RRR by 50 basis points.
Undoubtedly, the latest stream of positive economic data triggered some sort of optimism within financial markets, however the possible threats for the second largest economy are far from over.
The Chinese government has to deal with the growing pile of corporate debt which is now estimated at around 160 per cent of GDP. In addition, another concerning issue which was noted in a report issued by the IMF was that circa $1.3 trillion of corporate bank loans owed by firms who might struggle to service their interest payment and that a lack of action may negatively impact bank losses by circa 7 per cent of GDP.
For the time being lets enjoy the latest positive economic figures, however investors should be aware that sustainability in positive economic data is crucial both for the domestic economy but also for other markets. In my view, the positive factor in China is the fact that both fiscal and monetary politicians still hold a wide range of tools to stimulate the economy if need be.
Disclaimer: This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd. has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.