Chinese Economy Seen Through Leading Indicators... Is a Turning Point Approaching?

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[Asia Economy Reporter Hwang Junho] It has been suggested that the likelihood of an inflection point in the Chinese economy has increased through changes in leading indicators such as China's monetary and fiscal policies, real estate prices, and inflation. Researcher Kim Kyunghwan of Hana Financial Investment revealed this in the 'China Weekly' report.

First, the growth rates of the total social financing (monetary policy), which is the most influential leading economic indicator in China, and the issuance growth rates of local government bonds and special bonds (fiscal policy) have rebounded for three consecutive months since hitting a bottom in October last year. This indicates that the expansion phase has officially begun. Total social financing is a unique Chinese liquidity indicator that integrates bank loans, stock/bond issuance, and non-bank financing. It most concretely reflects the monetary policy stance of the People's Bank of China and is generally considered to lead nominal GDP and actual growth rates by 6-9 months. The issuance growth rate of local government bonds and special bonds reflects the fiscal policy stance since 2016 and is used as a leading indicator of infrastructure investment led by local governments.

Additionally, the Chinese real estate situation is improving. To analyze the Chinese economy, it is necessary to examine the rebound and impact of month-on-month changes in housing prices in China's top 70 cities. The number of cities among the top 70 where housing prices rose month-on-month dropped sharply from 62 out of 70 in March last year to 9 out of 70 in November, but rebounded to 15 out of 70 in December, marking a recovery after about a year. Considering the policy stance changes, housing transaction areas, which lag prices by about three months, are likely to rebound or achieve a soft landing from the second quarter. Credit risks related to Chinese developers are also expected to gradually decrease starting from the second quarter.

However, the producer price index (PPI) in China has fallen for three consecutive months, indicating a possible easing of global inflation. China's January PPI recorded 9.1%, significantly below the market expectation of 9.5%. This marks a three-month consecutive slowdown. Despite the rise in domestic and international commodity prices in January (month-on-month increases in energy and raw material prices) and a reduction in the month-on-month decline, falling output prices in forward manufacturing sectors such as equipment manufacturing, pharmaceuticals, automobiles, and electronics suppressed the upward trend. The decline in output prices in China's upstream industries causes Chinese export prices and major countries' import prices to fall faster than the figures suggest. Typically, China's PPI is considered to lead the US import prices, core prices, and expected inflation, and clearly precedes the US 10-year Treasury yield by about 6-9 months. Researcher Kim predicted, "From the perspective of Chinese export prices, the inflation pressure on the US supply chain and Treasury yields are likely to peak as early as the second quarter."

However, breaking down China's January inflation suggests that current upstream demand in China may be weaker than expected, and the Chinese government's stimulus policies in the first half of the year are likely to be further strengthened. Researcher Kim advised that the weak upstream demand implies difficulties for related companies in passing on prices and margin squeezes, indicating the need for stronger responses.

This content was produced with the assistance of AI translation services.