The Good News Out Of China
The Euro Mess is as messy as ever. However, bond yields have remained relatively low in Spain and Italy thanks to ECB President Mario Draghi’s promise to provide unlimited liquidity to both countries as soon as they ask for bailout funds from the European Stability Mechanism, and accept its conditions. So far, neither country has even asked for help from the ESM.
Hard Soft Landing
China seemed to be heading toward a relatively hard soft landing during the summer. Beijing responded with a mini-stimulus, cutting interest rates twice in June and July and stepping up investment by state companies and spending on building airports and other public works. Chinese data released for October suggest that the recent round of monetary and fiscal stimulus may be working:
(1) Industrial production rose 1.4% m/m and 9.6% y/y to a new record high. Retail sales rose 14.5% y/y. Auto sales rose 6.4% to 1.3 million vehicles, rebounding from September’s 0.3% contraction. Investment spending rose 25.2% y/y.
(2) Exports rebounded 2.1% m/m during October, very close to the record high earlier this year during May. This is an encouraging development since it confirms our view that the global economy may be slowing, though still growing. Also on the upbeat side was the 6.1% m/m increase in imports.
The rebound in Chinese exports during October was led by a 2.1% increase in exports to the rest of the world, i.e., the total excluding the U.S., EU, and Japan. These exports now account for a record 61% of China’s exports, up from 50% six years ago. China’s recent dispute with Japan may account for some of the weakness in trade between the two over the past couple of months. However, China’s exports to Japan are down to only 7.2% of the country’s total from about 16% 11 years ago.