25 October 2016
While many investors have been burned by the ups and downs of the stock market in China, the average consumer in the country has largely been unaffected so far. Photo: CNSA
While many investors have been burned by the ups and downs of the stock market in China, the average consumer in the country has largely been unaffected so far. Photo: CNSA

Maybe things aren’t so bad in China

With the equity market volatility and the ensuing panic following the surprise devaluation of the yuan, the negative attitude towards the Chinese economy has reached fever pitch.

Given the number of column inches devoted to just how bad things might get in China, it’s easy to overlook the positives.

Yes, there are some reasons not to be so gloomy.

Our own survey data provides an invaluable insight into what two critical driving forces of the economy — businesses and consumers — are thinking.

The data shows that both have been hit hard by the slowdown in the Chinese economy, but latest evidence suggests that things might be starting to improve.

It appears that the stimulus measures since the end of 2014 are starting to bear fruit. Confidence among executives at China’s largest companies surged to a one-year high in August with July’s slump amid stock market volatility proving temporary.

Business sentiment has been choppy so far in 2015. However, the latest result puts the indicator back into daylight and bodes well for official data and future business conditions.

The MNI China Business Sentiment Indicator rose 17 percent to 57.1 in August from 48.8 in July, more than offsetting last month’s slump when it was around the level seen in the depths of the financial crisis.

Discounting last month’s plunge, which we think was driven more by animal spirits than a tangible lull in activity, sentiment has increased since May alongside some stabilization in official economic data.

What exactly is behind the renewed optimism?

It was those in the manufacturing sector that led the rise in sentiment in August. That said, companies in the service sector also recorded an improvement.

And the detail underlying the headline sentiment indicator (which is non-seasonally adjusted) also showed that the increase in confidence was driven by a higher percentage of respondents who reported that over the month business conditions were better – rather than unchanged.

Moreover, key business measures in the survey such as new orders and production surged in August and now sit at the highest they have been in 2015, suggesting economic activity may improve somewhat.

While the MNI China Business Sentiment Indicator still sits just below its long run average, new orders stands well above its series average which should help to underpin activity over the coming months.

Accompanying the pickup in sentiment about the current situation, companies revised up their expectations for future conditions.

The Future Expectations Indicator for business conditions rose 12.6 percent to 60.9 in August from 54.1 in July.

Firms were also more upbeat about their future orders and output, suggesting that most companies still expect more supportive action from the government in the near future.

The latest increase leaves the MNI China Business Sentiment Indicator only a whisper below last year’s high of 57.3 which was also recorded in August although conditions have been generally much softer since that point with the authorities trying everything from ‘mini-stimulus’ to widespread monetary easing to prop up growth.

Note that the significant devaluation in the yuan occurred right at the end of the August survey period, so we’ll have to wait until September to gauge the impact.

On the demand side of the equation, things are also starting to improve. It was our consumer survey, the Westpac MNI China Consumer Sentiment Survey, which first flagged that the sharp downturn in growth seen during 2014 might be starting to abate.

As early as December last year there were tentative signs that the plunge in consumer sentiment was beginning to level off. Consumer confidence in China, measured by the Westpac MNI China Consumer Sentiment Indicator, has trended up in recent months, hitting its highest level in one year in July.

Key measures in the survey such as current and future business conditions, which have a high correlation with key Chinese data, have picked up noticeably and recently consumers have also been more upbeat about their financial situation.

Moreover, the July survey showed just what Chinese consumers made of the ructions seen in equity markets. While many investors will have been burned by the ups and downs of the stock market, the average consumer has been largely unaffected so far, a key point to make amid the gloom.

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Chief Economist MNI Indicators

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