One rare constant in global markets is China’s never-ending stream of contradictory signals.
On the “worry” side of the ledger, consider that. China’s Shanghai Composite stock index is down 11 percent this year. Last week the renminbi reached its lowest levels versus the U.S. dollar since June 2008. And China’s hot housing market is in bubble territory.
But other numbers say that China’s economy is doing just fine.
Earlier this year, we noted four figures that are key to interpret what’s really going on with China’s economy. And the latest numbers suggest that China’s economy is humming along.
China’s manufacturing industry is expanding
The first key figure is the Manufacturing PMI (Purchasing Managers’ Index). This reflects the health of China’s manufacturing sector. A PMI reading above 50 means the manufacturing sector is expanding. Anything under 50 means it’s shrinking.
China is trying to shift its economy to being more consumer-driven – that is, encouraging local Chinese citizens to buy more good and services in China to support economic growth. But China is still the world’s biggest manufacturing centre. So a strong manufacturing PMI number means an important driver for China’s economy is healthy.
The PMI reading for November, 2016 was 51.7, which was the highest reading since July 2014. This means that the manufacturing sector is expanding. And after struggling last year, the PMI has been above, or at, 50 for most of 2016, and has been climbing higher since July, as shown above. China’s manufacturing sector is looking healthy.
Industrial production is holding steady
China’s industrial production measures the performance of the manufacturing, mining and utilities sectors, by looking at the change in the value of what they produce.
As noted below, China’s industrial production growth fell by more than half between 2011 and 2015. But this year, growth has leveled off.
China’s industrial production may never reach the double-digit growth it saw earlier this decade. (It may be impossible… the numbers are just getting too big, as we explained here.) But if industrial production growth holds steady, that’s still a good sign for China’s economy – after years of declining growth rates.
Exports and imports are growing
When China’s October trade data was released two weeks ago, it showed that the total value of China’s exports and imports had increased compared to the year before. It was the first time both imports and exports had increased since October, 2014.
Exports were up a barely visible 0.1 percent – not much, but better than the expected drop of 5 percent. And it’s much better than the 7.3 percent decline in exports for the 12 months ending October, 2016. It was the first year-over-year increase in exports since June, 2015.
And Chinese imports – the amount China buys from other countries – grew more than exports. The value of goods imported in October was up 6.7 percent compared to a year earlier. That’s the fastest growth since September 2014.
Imports grew despite continued weakness in China’s currency, the renminbi, which hit at an 8-year low versus the U.S. dollar last week. When a currency is falling, imports become more expensive. This growth suggests that Chinese consumers, led by the growing middle class, are spending more of their rising incomes on more imported goods.
The Baltic Dry Index has been climbing too
The Baltic Dry Index (BDI) tracks the daily pricing of shipping raw materials (like metals, grains and oil) by sea. It’s often used to measure the health of the global economy, since shipping prices are driven by supply and demand of the materials that are used to fuel the global economy’s demand for things.
It’s also a great way to get an idea of what’s happening in China. That’s because China is the world’s biggest consumer of raw materials. It needs these raw materials to feed its huge manufacturing sector.
So, when the BDI is climbing, it can be a good indicator that China’s manufacturing is ramping up.
The BDI peaked at over 11,000 in May, 2008. That bubble collapsed soon after. It then peaked above 4000 in May, 2010 and went on a steady decline until it bottomed at 290 in February this year.
But the index has rebounded since. It’s now 225 percent higher than February lows. It may never again reach the heights of May, 2008, or even May, 2010. Regardless, the upward trend is a good sign that China’s, and the world, economy is set to grow.
Interestingly, China’s copper imports (one of the world’s most important raw materials) climbed to 380,000 tonnes in November.
That was 90,000 tonnes more than it imported in October and the first uptick in copper imports since March of this year. (But still lower than the November 2015 total of 462,000 tonnes.)
More demand for copper means that there is more manufacturing, building and producing – all good signs for China’s economy.
What it all means
An expanding manufacturing sector, stable industrial production, growing exports and imports, and a climbing Baltic Dry Index all point to one thing – China’s economy is improving or, at a minimum, stabilising.
If these fundamentals continue to improve, it will be a good foundation for China’s economy to grow on. It also bolsters the case for investing in China. To find out more about the best Chinese companies to invest in, and how to do it, click here.