The lead political and economic story this week is the relationship between the U.S. and China, as the two heads of state had their first serious meeting.
China is a massive topic of course, and trying to get your arms around it defies simplicity for the practitioner. But from a conceptual understanding of the biggest issues in China, we thought we would take a bit of a different tack for Global Perspectives.
We have many friends in the financial industry, and we took an informal poll of some of our favorite analysts, economists and direct market participants. We asked one simple question – “If there is one data point that the market should focus on regarding the Chinese economy, what would it be?”
The question elicited many different answers from more than a dozen market participants, but there are three general conclusions we drew from our questions:
- There is widespread skepticism in the veracity of official Chinese data. This has long been the case in the markets, particularly for headline data points like GDP and inflation.
- When possible, use data that has external corroboration, like international trade or manufacturing data available on a subscription basis by private companies. This includes more directly observable results like factory production or even electricity usage.
- If you have to pick one topic though, it would be the vast amount of credit in the Chinese economic system.
This last point was the closest we came to a real consensus, although there was plenty of nuance in the data points people are following. Some look at loan creation data, others at total credit or some other leverage data.
While no one discounted other macroeconomic factors like growth, exchange rates, inflation, etc., the biggest source of concern remains how much debt is still weighing down the Chinese economy and what would happen if the credit spigot suddenly stopped.
While too much credit in an economy may seem like a domestic issue, Chinese leaders know that it is part and parcel to any talks about trade and investment with the U.S.
Our view: We know that North Korea and trade is the focus of these two leaders at the moment, but we want to remind our readers and viewers that there is more simmering under the surface in China. There are still major concerns in China’s economy that Mr. Xi will have to address when he goes home.
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