Chinese economic and market weakness has been one of the major macro themes of 2013. Whether it’s been Chinese equities (ex-Internet), companies highly exposed to Chinese industrial growth (like CAT or BHP), industrial commodities (iron ore, copper, etc), or the currencies of countries tied to Chinese growth (like the Aussie Dollar or the Brazilian Real), it’s been a relatively consistent theme.
Goldman Sachs had an interesting note this morning indicating some potential signs of stabilization:
For the remainder of the year, we expect a sequential improvement in activity in China, with a rise from 6.4%qoq in Q1 to around 7.8%qoq in Q4 (see here). This rests on two influences. We expect global growth to recover in the second half, led by an improvement in private sector demand in the US. The improvement in the DM PMIs looks to be pushing global growth towards the recovery we expect in H2. Stronger global growth is likely to be positive for Chinese export performance, mirroring the developments already recorded in China’s export data for July.
Second, we expect investment spending to improve in H2 due to accommodative credit conditions earlier this year and recent policy changes targeted at supporting specific demand areas such as urban housing redevelopment and infrastructure building, railway investment and energy conservation and environmental protection. These policy initiatives may already have shown up in the import data and we expect them to help to boost activity in H2.
However, judging by our client conversations, slower activity momentum in China seems to be the consensus view. Therefore, it would likely be a positive surprise if activity were to stabilise or indeed pick up in the second half of the year, as we forecast.
I’m more skeptical than GS research, mainly because of the large amount of overcapacity constraining production growth in China, but it’s worth noting that some price signals related to China have shown signs of stabilization. First, copper is hitting its highest level since early June today:
It held the very important 300 area, which is long-term support. Copper still has a declining 200 day moving average, but the short term move higher is worth watching for continuation.
Meanwhile, the underperformance of the materials sector in the U.S. has been well documented. Yet, the materials ETF is actually close to flat vs. the SPY since its low in mid-April:
Finally, the Australian dollar, which has declined almost 15% in the past 4 months, a huge move for a developed market currency, is flat in the past month, after rallying back above 0.90 today:
AUD/USD is still in a strong downtrend, and has not risen above the 50 day moving average during the entire move. But it’s worth keeping an eye on whether this stabilization holds.
Like I said, I don’t necessarily agree with the view of a second half Chinese rebound. But given the beaten up expectations, I’m watching price signals and maintaining a flexible stance on this longstanding theme over the next few months.