China economy still faces downward pressure

July 19, 2019 12:33
The Li Keqiang Index, South Korea’s exports performance, and corporate earnings all point to continued downward pressure on China's economy. Photo: Reuters

China’s economic growth slowed to 6.2 percent in the second quarter, the weakest in 27 years. While the slowdown was well-expected, downside pressure may continue, particularly if the trade dispute with the United States remains unresolved.

The Li Keqiang Index (comprising railway cargo volume, electricity consumption and bank loans) and South Korea’s exports performance are pretty good indicators of China’s economy. Both gauges have been showing a downtrend since the second half of 2017, indicating that the mainland economy would continue to face headwinds.

Corporate earnings can also serve as a pretty good leading indicator.

The 12-month EPS growth of MSCI China constituents peaked in early 2018, when the US-China trade war officially began.

The growth pace fell into negative territory in January and May. As of June, the gauge was down 7 percent from a year ago.

Similarly, the 12-month forward EPS of MSCI Hong Kong constituents also topped out in the first quarter of 2018. It has turned negative since the start of this year. As of June, it’s down 25 percent year on year.

Hong Kong-listed companies rely heavily on the Chinese economy. Of 1,700 companies that disclose the geographical breakdown of their income in their financial reports, 1,200 derive more than half of their revenue from China.

Meanwhile, the ratio of Hong Kong-listed companies issuing profit warnings out of all profit alerts increased to 74.5 percent as of July 16, the highest level in three years. That could be another sign that China's economy is not out of the woods yet.

This article appeared in the Hong Kong Economic Journal on July 18

Translation by Julie Zhu

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Hong Kong Economic Journal chief economist and strategist