Summer was not very kind to the Chinese economy. We’ve seen the country hit by concerns of credit overexpansion, as well as negative manufacturing data and declining exports. On top of macro issues, companies that usually prosper in China like Nike (click ticker for report: ) and Yum! Brands (click ticker for report: ) posted weak results.
However, after bottoming out at 47.7 during July, the HSBC China Manufacturing PMI compiled by Markit turned modestly positive at 50.1 during the month of August (anything above 50 represents expansion). Industry destocking appears to be mostly completed, and manufacturers are receiving more new orders.
HSBC’s lead Asian economist Hongbin Qu implied the economy had bottomed, saying in the press release:
“The final reading of August’s HSBC China Manufacturing PMI recovered to 50.1, from an 11-month low of 47.7 in July. This implies that growth in China’s manufacturing sector has started to stabilise on the back of a modest rebound of new orders and output. This was mainly driven by the initial filtering through of recent stimulus measures and companies’ restocking activities. We expect some upside surprises to China’s growth in the coming months.”
China’s internal PMI registered a 51, also indicative of expansionary economic activity. Strong domestic demand is accounting for the lion’s share of growth, but rising international demand is another positive going forward.
Contrary to manufacturers, Chinese retailers aren’t feeling so positive about the prospects of a recovery. Although higher-end names like Tiffany (click ticker for report: ) and Coach (click ticker for report: ) aren’t feeling the pain, local retailers are citing that higher savings rates and a more cautious consumer are negatively impacting consumption. Still, retail sales are increasing at a low double-digit rate, instead of a high double-digit rate—conditions could be much worse.
Valuentum’s Take
Chinese GDP growth during the second quarter slowed to 7.5% from 7.7% during the first quarter. While any Western economy would consider 7.5% growth a blessing, China has become accustomed to 8-10% expansion, and residents may not be pleased when quality of life stops expanding at such a rapid pace.
Nevertheless, the Chinese government seems willing to do everything in its power to prevent growth from slowing below 7%. Economic stimulus and measures designed to improve the health of the banking system could remain in place as long as necessary.
Though it appears some stabilization is taking hold, we’re not forgetting about the enormous shadow banking industry and the $23 trillion in overall credit in China—2x its GDP.
Our strategy with respect to China remains the same—stick to high quality secular growth stories that won’t be crushed by sub-7% growth. We hold shares of search giant Baidu (click ticker for report: ) in the portfolio of our Best Ideas Newsletter.
Related Companies: Vale (VALE), Rio Tinto (RIO), BHP (BHP)
Related ETFs: FTSE China 25 Index Fund (FXI), Australian Dollar Trust (FXA)
Other China Equity ETFs: SPDR S&P China (GXC), PowerShares Golden Dragon China (PGJ), Guggenheim China All-Cap (YAO), iShares FTSE China (FCHI), Market Vectors China ETF (PEK), Morgan Stanley China A Share Fu (CAF), ProShares Short FTSE China 25 (YXI), ProShares Ultra FTSE China 25 (XPP), ProShares UltraShort FTSE China 25 (FXP), iShares MSCI China Index (MCHI), Direxion Daily China Bull 3X Shares (YINN), Direxion Daily China Bear 3X Shares (YANG), RBS China Trendpilot ETN (TCHI), Wisdom Tree China Dividend ex-Financials (CHXF), KraneShares CSI China Five Year Plan ETF (KFYP).