Today the conference board announced a downward revision in its almost brand new leading indicator for China, suggesting that Chinese growth trajectory will be slower than expected. Markets characteristically did not react well, with the Shanghai stock exchange falling over 4% today, extending its losses to 26% from the peak. But liquidity rather than just the news about the revision seems more likely to be the cause.
The most recent (April 2010) reading of the conference board leading indicator, which launched earlier this quarter shows an increase of only 0.3% rather than the 1.7% previously indicated. The downward revision, wholly due to a miscalculation in one of the four main indicators used (the construction sector), brings the CB survey more in line with the longer standing OECD leading indicator for China, which has been signaling a deceleration of growth of late. In fact, the strength of the indicator was puzzling when the first version was released in mid June, since it seemed at odds with a range of other recent data.
Today’s market moves seem to be a confluence of factors restraining liquidity – a big IPO (the agricultural bank of China) which deterred investment from other equities, restrained inflows (new accounts, a traditional measure of inflows, remain subdued on a four week rolling basis). Expect Chinese authorities to start injecting more liquidity.
As we will detail in upcoming analysis pieces and our global outlook, Growth dynamics in China continue to play out largely along the lines RGE has been expecting, with growth, especially industrial production, moderating, after peaking in Q1 as we have highlighted in a string of China focus publications. With U.S. growth set to slow in H2, as my colleagues have been highlighting, and risks to European growth on the downside as fiscal austerity kicks in, Chinese (and Asian) consumption growth will be insufficient to absorb domestic production. No wonder markets are skittish as they readjust to a more uncertain outlook in the Chinese and global economy.
For more on leading indicators in China and around the world see our related Critical issues:
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