China's National Bureau of Statistics will release the GDP report for the first quarter of 2014 on Tuesday night. Investors should expect the worst, just to play safe.
Bill Adams, a senior economist at
Investment growth likely slowed in the first quarter due to higher interest rates and a slowdown in the real estate market, both a symptom of each other. If China's GDP growth falls below 7%, the government will probably accelerate stimulus in the second and third quarters of 2014.
For now, China has been pulling away from spending on growth in hopes the private sector will pick up the slack.
-- China is underperforming the world. And by wide margins. Here, the financial sector heavy iShares FTSE China ETF is off by more than 8% year-to-date ending April 15 while theIn particular, Beijing has been reducing fixed asset investments (FAI) in infrastructure all year, now down to under 20% year over year growth. The decline in Chinese FAI means economic growth will have to come from other sources instead of the government. As Beijing spends less, the economy will undergo a number of knock-on effects in key sectors, namely real estate, metals and infrastructure. All of this will impact China's GDP, which is why economists see China growing less than 7% in the not-so-distant future.
China's leaders are trying to restructure the economy away from exports, as well as solve the problem of overcapacity, largely a result of FAI. China's leaders are willing to tolerate slower growth. The market, on the other hand, has been less accepting.
Despite years of economists calling on China to reduce spending on subways and airports in third tier cities, now that the reduction has come, investors have shied away.
Jut as the Central Banks of the West drive securities markets, so do the decisions of the Communists in Beijing drive China's.
Both the MSCI China Index and the iShares FTSE China Xinhua 25 (FXI) exchange traded fund are underperforming the MSCI Emerging Markets benchmark by at least 500 basis points year-to-date. Most of that is due to the bad news flow out of China. Even neutral news is considered negative. The other reason for the underperformance is the fact that Beijing has stepped off the gas pedal.
If the government continued to carry the burden of further investments, China's production efficiency and rate of capital return would drop to a very low level, most analysts believe. In this case, China could only sustain its growth through borrowing and investment.
In addition, slower income growth would be a red flag that the economy has cooled too much. If it is reported, the government will encourage faster credit growth and pull forward infrastructure investment plans in mid-2014. The market might actually like this for the short term, but long termers will have more to worry about. As it is, everyone is concerned over China debt.
"China credit definitely keeps us up at night," says Nico Marais, head of multi-asset investments at
For Adams at PNC, the base case is that China's first quarter data will be the trough for real GDP growth this year.
The concern for China is not the rate of growth, which is still three times faster than most other large economies. The uncertainty lies in the financial sectors non-performing assets and high local government debt. According to the World Bank, which garners most of its data from the Chinese government, non-performing loans at Chinese banks is on par with the averages in the core economies.
For global investors, Chinese economic data can be a buy or sell signal for risk assets.
See: China GDP Gauge Shows Deeper Slowdown --
China's Slowing Fixed Asset Investments -- The Diplomat
No Stimulus For Resilient Economy -- China Daily
