With a very thin economic data set and western understanding of China’s political and economic decision process which is even thinner, wild stories about what is “really happening” easily take root.
It is clear that China’s manufacturing sector has weakened however, since much of the “official” economic data such as GDP is now deemed “unreliable”, it is difficult to use these surveys to estimate the degree of slowdown, or from what level.
It is unlikely that the economy has ground to a sudden halt. The main manufacturing surveys will not pick up trends in the key property development sector. Property sales and prices are now rising, while the important services sector does not appear to have weakened materially. At any rate, the effects of the recent monetary and Q2 fiscal stimulus will appear only with a lag.
The key issue for investors is whether the slowdown in China is, on balance, beneficial for the world economy.
Of course a deep recession in China would be a large negative for the global outlook, however a slowdown to a more sustainable rate would be a benefit to a large share of global households and firms, especially those in net oil importers, including the US, but more especially in the Eurozone and Japan.
While the Fed and the BOE look set to tighten policy to take account of domestic conditions, the disinflationary pressures from slower growth in China will help keep interest rates lower for longer and provide an important prop for household real income growth.
