Recently some cautious investors and traders have been talking about China’s economic problems, which are tied to its credit tightening. Perhaps this is why the Chinese stock index is lagging both the European indexes and the S&P 500.
Here’s a chart of the Shanghai Index. As you can see, the Shanghai Index has not even made a new high in 2017!
We have 2 questions:
- Just show significant are China’s problems right now?
- How will this impact the U.S. stock market? How is this comparable to 2012 and 2014-2015 when the Chinese economy deteriorated?
Is Chinese economic growth deteriorating?
China’s economy is primarily driven by its manufacturing sector, which is why we’re focusing on manufacturing sector indicators. As you can see in the charts below, China’s credit tightening has caused manufacturing growth to slow down a little. The slowdown is more pronounced in its services sector.
After a temporary surge in March 2017, China’s Industrial Production is back down again.
China’s Producer Prices peaked 3 months ago and has fallen a little since then. This is consistent with global inflation, which peaked 3 months ago and has been flat ever since.
New Orders has been flat after a surge in late-2016. Last month, New Orders tumbled a little.
After a surge in late-2016 and early-2017, China’s Export Prices has fallen a little in March 2017.
Services continues to be the weakest side of China’s economy. China’s Services PMI has been falling ever since 2017 began. However, you can also see that Services PMI has always been a volatile indicator. Hence it is not the best indicator for the Chinese economy.
China’s economic growth has slowed down a little. This is reflected in China’s quarter-over-quarter GDP growth rate, which has fallen since mid-2016. (Quarter-over-Quarter is better than Year-over-Year, which lags).
It is not a significant slowdown, but investors should definitely watch out in case the situation deteriorates.
What this means for Europe
Europe’s economic growth relies on China. That’s why Europe’s economy bottomed in early-2016 when China’s economy bottomed. For example, exports to China account for more than 2.6% of Germany’s GDP and 1.3% of Europe’s GDP. (China imports a lot of industrial products from Germany, which is another manufacturing powerhouse.)
Hence, you can see a clear correlation between China’s economic indicators and Germany’s economic indicators. Once again, here’s China’s Producer Prices chart.
Here is Germany’s Ifo Business Climate Index.
Notice how China and Germany both deteriorated from mid-2011 to late-2012. Then both of them deteriorated in 2014 and early-2015.
How this will impact the U.S. stock market
History shows that China’s economy only causes volatility in the S&P 500 AFTER China’s economy has deteriorated significantly.
- China’s economy (and Germany’s economy) deteriorated from late-2011 to mid-2012. The S&P 500 rallied vigorously in late-2011 and early-2012, after which it made a small 10.9% correction.
- Germany’s economy deteriorated in early-2014 and China’s economy deteriorated in mid-2014. The S&P only started to experience volatility in the second half of 2014.
China’s economy has not deteriorated significantly right now, but U.S. investors should watch out.
*Using China’s/Germany’s problems to predict the exact tops and bottoms U.S. stock market corrections is meaningless. Small corrections usually begin and end on no specific news/triggers.
As we’ve been repeating on Market History, the U.S. stock market is overdue for a small correction. However, this correction will not be driven by China’s economic problems, which are not significant enough to have an impact on U.S. stocks yet.