An Alternative Way Of Looking At China

It is somewhat surprising just how fast investors are willing to change their opinion when the deltas inflect positively but how long it can take to make a change in a negative direction. Textbook psychology. In this instance, I am referring to China and how the entire narrative changed after one timely PMI report inflected higher after several months of deterioration.

Many question the validity of the self-reported Chinese data and I am not one to say it is manipulated or massaged. As I do with any data series or any inflection point in economic growth, I look at a confluence of data, and when the aggregate basket of indicators inflects in a pronounced and consistent way, I change.

Famous investor and known China skeptic Kyle Bass often says that just to be sure, he likes to back his way into China’s data via their trading partners.

In this note, I offer an alternative view on China’s data and one that questions the turning point in the Chinese economy rather questioning the validity of any data set.

One way to get a fairly honest read on China is to measure the exports to China from their trading partners. It is not good practice to use just one or two data points, but if we have a look at the exports from several partners, coupled with the data from China, we can have increased confidence in a material inflection point.

Below I will present the export data of several key players in world trade, all of which are pointing in a similar direction. These are not random, or cherry-picked data points as every one of these export metrics had a material acceleration into the 2016 global economic inflection.

Also, I am not saying that China’s economy has certainly not inflected higher but after studying a more comprehensive data set rather than a single PMI report, it is reasonable to suggest more time may be needed before we can definitively say that China has bottomed.

The export data from South Korea is down 17.30% year over year.

South Korea Exports To China Year over Year:Source: Bloomberg

Japan exports to China popped nicely last month, similar to the PMI report which is a bullish sign on the margin.

Japan Exports To China Year over Year:Source: Bloomberg

Malaysia, another large exporter to China, posted an export figure that declined 1.60% compared to the same month last year.

The China PMI “surge” was for the March reporting period and all the export data presented is either for February or for March as well.

Malaysia Exports To China Year over Year:Source: Bloomberg

Taiwan exports to China have fallen 19.10% compared to the same month last year. I am truly not concerned with any individual monthly reading but rather the trend.

Taiwan Exports To China Year over Year:Source: Bloomberg

It is certainly possible that the China PMI report will lead the rest of global trade, but it is not unreasonable to suggest that more data is needed to confirm an inflection point in the Chinese economy that started a downtrend in late 2017.

While the month to month data is volatile, each of these export figures presented above tracks the China PMI data on a trending basis.

China PMI Vs. Taiwan Exports To China:Source: Bloomberg

On a smoothed basis, the data becomes even more clear.

China PMI Vs. Taiwan Exports To China (Smoothed):Source: Bloomberg

When studying China, it is worth taking a look at their trading partners in addition to the self-reported data from the Chinese government. I don’t dismiss any data points but only make a definitive call about economic inflection points when an aggregated basket of reliable data inflects in a pronounced and consistent manner. At times, this means missing the bottom tick or the top tick but I am not comfortable calling an inflection point after one month of data, and neither is the bond market.