Investors Nervously Await The Release Of Chinese GDP

Chinese GDP is being billed as the biggest bit of data to emerge from Asia this week (the release is scheduled for 02:00GMT on the 18th), which is completely understandable when one considers that China is the economic powerhouse of the region and the chief driver of global growth over the last decade.

In fact, the fate of the global economy may be decided by the severity of the economic slowdown in China. After all, with the other BRIC nations also struggling, recession levels of activity in Europe and only a mildly expanding US economy, there isn’t really anywhere else to source the kind of demand that China can offer.

However, a turnaround in Chinese GDP growth is unlikely during Q3. Current estimates put the headline Q3 GDP figure at 7.4% yoy, down from 7.6% at the end of Q2. Looking at the limited amount of official data out of China during the quarter it is not hard to see why the market is looking for such a historically low figure (by historically low we are referring to the last decade).

Manufacturing PMI, the official and HSBC figures, were in contraction territory (the official figure was 49.8 at the end of Q3, whilst the unofficial figure was even lower at 47.9 – 50 separates expansion from contraction), highlighting the negative sentiment amongst Chinese manufacturers. Without a pickup in sentiment in the economically critical manufacturing sector, it is hard to see a rebound in GDP growth.

Furthermore, retail sales, industrial production and industrial profits softened throughout the quarter. Exports only escaped a similar fate because of a surprise 9.9% rise in September, likely a one off, and before that export growth was slowing significantly due to weak levels of demand, particularly from Europe and the US.

At the same time, officials in Beijing didn’t aggressively attempt to boost growth during the quarter. There were no cuts to the required reserve ratio (a ratio which dictates how much capital major banks must hold in reserve, thus it, indirectly, controls how mush said banks can lend) and only a 0.33% cut to interest rates (China’s 1-year lending rate was cut to 6% from 6.33% in July), whilst there was some infrastructure spending by the government it was not significant enough to be classified as outright stimulus.

We note the PBoC was fairly active in China’s financial markets, selling reverse repos through open market operations, which should have provided some much needed liquidity to China’s largest banks which were reluctant to lend due to global financial uncertainty. Nonetheless, the measures undertaken to simulate growth during Q3 could be likened to trying to start an engine with only a minute amount of petrol.

Overall, we think the consensus of the market is right in predicting a headline figure of around 7.4%. There is, however, the potential for severe disappointment if the figure prints much below this, especially if we see a sub-7.0% figure. Whilst the likelihood of the later is remote in our opinion, there is possibly that even a 7.4% print wouldn’t be enough to satisfy the market.

Market reaction
The aussie will be an interesting currency to watch, as Australia is highly dependent on demand for its commodities from China, thus AUD will likely give the biggest reaction to the data. In general, a print less than market expectation may result in AUD weakness and vice versa if the figure beats estimates. If sentiment is negative prior to the release AUD/JPY may prove to fairly volatile if the GDP print misses expectations, as JPY is a strong safe haven play. AUD/USD will also be a key pair to watch, especially if it is pushing higher before the data is released as this creates room for more of a retracement.

Industrial production YTD y/y (green), GDP y/y (white), Official Manufacturing PMI (yellow), Exports y/y (blue) and Retail Sales (red)
Source: Bloomberg

AUD/USD – daily

Source: FOREX.com

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