China's disjointed growth raises questions

Will debt problems finally come home to roost?

Chart of the Day

A quiet day for data and markets yesterday due to Martin Luther King Day in the US, so let’s take another look at the data out of China late Sunday. We saw yesterday that overall GDP growth reportedly rose to 6.5% YoY in Q4, which - leaving questions about data reliability to one side - was a decent result. But the activity data show that it was also a result heavily reliant on stimulus and demand from elsewhere. That has helped pushed industrial production up, but retail sales growth - a proxy for domestic demand - remains weaker than before the pandemic. This has rekindled some questions about the sustainability of China’s growth model, and whether it has regressed back to being highly reliant on unsustainable stimulus again. Check out this Twitter thread from top China watcher Michael Pettis if you want to learn more.

Macro

Of course, China is not alone in seeing its debt-load surge this year - it’s total non-financial debt to GDP ratio is similar to those in the US and eurozone.

But that is fairly striking given countries with lower GDP per capita tend to have lower debt-to-GDP ratios. China sits far ahead of, for instance, Mexico, even though their GDP per capitas are both about $10,000 USD.

The only data of note yesterday was from Canada. The housing market there has done well this year, and construction firms are responding accordingly. Judging by permits and housing starts, you wouldn’t guess there was a pandemic at all.

Markets

Obviously no movement in US yields yesterday given markets were closed, but the recent move in yields in the favor of the US suggests China’s currency has not got much further to appreciate.

Implied FX volatility is still elevated in some of the EM and high-beta currencies like the NZD and AUD, but is now lower than in recent years for many other currencies.

Another sign of a return to normality is that cross-currency basis (essentially a measure of USD shortage) is slowly moving toward zero for currencies like the yen - in fact, it is more favorable than before the pandemic, partly because of the massive liquidity injections from the Fed.

Meanwhile, this chart shows that eurozone equities continue to lag well behind their US peers - the Euro Stoxx still hasn’t surpassed its early 2020 level in fact.

In the past month, there have been some similarities and one key difference between sector performance. For the S&P 500, it’s been a clear case of cyclical sectors outperforming, namely energy, financials and materials. By contrast, higher real rates have hit tech stocks.

In the eurozone, real rates have not risen so much and tech stocks have actually outperformed. Energy and financial have both done well also, but have not risen by as much as in the US.

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