Chinese growth: the good, the bad and the ugly

Regarding GDP data, a fair reading of all of the major data releases in China suggests that the economy is gradually slowing down, not suddenly tumbling into recession. Industrial output is steadily slowing, running at just 6.1% yoy through August. Retail sales have also been slowing over time, but after bottoming in April at 10%, growth has accelerated to 10.8%. In a similar vein, fixed asset investment has been trending lower for some time, but the drop may be decelerating.

PMIs offer an alternative gauge of growth. Recently, investors have reacted to the manufacturing PMI dipping a couple tenths below the 50 breakeven level. However, simple regression analysis shows that a 50 reading on China's PMI is associated with about 8% growth in industrial production. The PMI would need to fall to 44.7 to signal no growth in industrial production. 

Moreover, this weakness is not new: the manufacturing index has been bouncing around 50 for several years, and the latest 49.8 reading is only a slight deterioration relative to the 50.5 average of the last four years. The nonmanufacturing PMI is on a gradual downward path, but remains well above 50. The unofficial Caixin PMIs are weaker and are at the bottom of their recent range.

China "feels" a lot weaker than the 7% headline GDP number. This may be because of stealth strength in the service sector or because the data are smoothed. However, some of China's slowdown was expected, and global economy and markets have been adapting to a weaker China for several years now, argues Bank of America ML.