Why China’s bottoming is very important for global markets?
We believe that whether China has bottomed in the fourth quarter of 2015 or in the first quarter of 2016 to be the single most important question for global markets in the near term. If we simply reflect back on a series of events that took place since 11 August 2015 when China unexpectedly depreciated the CNY sharply, this was an obvious acknowledgement of an economic slowdown, and hence the market interpreted this as a rise in the risk of a Chinese hard landing. Global markets capitulated in August to September 2015, after which the US Federal Reserve deferred its initial rate hike in September. In addition to all of the domestic reasons, concerns over China were taken into consideration in the Fed’s calculation this time, by proving the simple analogy that the ultimate outcome of a hard landing in China is global recession. We should reiterate that the Fed hike delay had been a very non-consensus call, especially before China depreciated its currency back in August.
After the August and September 2015 market corrections, any near term China bottoming would fundamentally determine, as an external factor, whether the Fed would hike in December and where the global markets were heading in the fourth quarter of 2015, and the quarters ahead. Hence whether China is bottoming is critical for global markets. Bottoming can be said to be taking place when there is a marginal improvement, or the economy is simply stabilising around the current level with no further deterioration, and bottoming can also take place within a narrow range. If this is the case, these are big positives for the global markets. It is in stark contrast to extremely bearish sentiment on China back in August and September in 2015.
If we are fortunate enough that the Chinese economy stabilises, then the next question we should ask ourselves is how long this stabilisation and improvement can last – one month, one quarter, or two quarters and more? These scenarios certainly have very different implications for global markets in the near term.
Why is China’s bottoming a very difficult macro call?
If we look back at what has happened here as well, by the end of 2014, when markets released their forecasts for 2015, it was predicted that the Chinese economy could bottom as early as the second or third quarter of 2015. However, the markets were wrong and the Chinese economy extended its deterioration into the third quarter of 2015, hitting its lowest real GDP reading of 6.9% since the Great Financial Crisis (GFC). The general pattern of second or third quarter bottoming for the Chinese economy was completely broken in 2015, as the prior practices adopted over the past four years were not repeated. Markets are puzzled and, as such, are losing confidence and fortitude in issuing early macro calls on when the Chinese economy is bottoming.
Back in early October, we were brave enough to call a bottoming of the Chinese economy, by showing the initial signs that we were monitoring. We are at least two months ahead of some – but still very few – market participants who are calling for sluggish stabilisation in December 2015. With China’s bottoming having been one of the most difficult macro calls, it is now becoming increasingly challenging to gauge the upside and downside of the Chinese economy while the overall trend is definitely declining.
Our call two months ago was, also, if the Chinese economy indeed bottomed in the fourth quarter and initial signs of stabilisation were strong in early November/December 2015, we could foresee a December Fed hike – even a small one – as a high probability event for global markets. And we were proven right.
What are further signs of bottoming?
It is time to update further signs of bottoming on top of the initial signs we saw two months earlier in October 2015. These are data we are tracking closely and which are the most telling in judging China’s current economic stage and direction.
How sustainable will the bottoming be?
We have been early in calling the near term Chinese economy bottoming. And we have been brave and early again in saying that China would likely be more of a stabiliser for the global economy in 2016 and 2017. The reasons for this are:
We think the Chinese economy is bottoming in the near term, at least over the next few quarters. Bottoming can be said to be taking place when there is marginal improvement, or the economy is simply stabilising around the current level with no further deterioration, and bottoming can also take place within a narrow range.
We also predict China would more likely be a stabiliser for the global economy in 2016 and 2017 for the following reasons: (1) deterioration of the current economic situation takes time to mature – at least another two years; (2) lagging policy effects from stimulus initiatives in 2015 might start to show from mid-2016 and further stabilise the economy; and (3) further sound policies can change the
Bottoming in a narrow range
Why is calling China’s bottoming a difficult macro call?
PPI stabilising is huge achievement
China, a stabiliser for 2016 and 2017