The accuracy of the Chinese economic data that investors base decisions on has long been open to question. So it was interesting to see certain Chinese officials this week querying whether or not reports of a declining Chinese interest in US Treasuries was “fake news.”
If it weren’t “fake news” markets would take a keen interest and certainly, before the reports were officially questioned, were moving accordingly.
That’s because the global economic order is increasingly bound up in what China does or says in markets, never mind what it does militarily or politically.
To be sure, it’s not fake news that China is gradually militarising the South China Sea with its construction work in the Spratly Islands. And it’s not fake news that North Korean missile tests have made regional powers and the US increasingly nervous.
But the real truth is that the influence Chinese money has in underpinning the global economic order increases by the day, and that’s where its real power lies.
So, whereas a decade ago, reporting of Chinese PMI, or purchasing managers index numbers was sporadic at best, these days it’s as regular as the quarterly and monthly clockwork that goes into motion for all the other major world economies.
And market commentators now report Chinese data as a matter of course, with all doubts about its accuracy temporarily cast aside. After all, in the absence of any other data, the data in hand is the best data.
But PMI numbers are useful in the extent that if surveys are properly carried out they can bypass official channels, and help analysts read more deeply into what the official statistics are really saying.
That’s because PMI surveys actually put questions to specific department heads inside economic organisations, rather than to the heads of those organisations themselves.
So far, so good. The most recent PMI numbers, for October and November show China still in significant growth. What with currencies across the western world continuing to weaken that growth will likely support the record trading levels that equities markets have hit in recent weeks for some time to come.
It ought to be doubly good for the listed miners, since their shares will be buoyant generally on the positive global economic outlook, and also specifically as the Chinese economy itself continues to suck in basic raw materials to use as the building blocks for all that growth.
But there are some red flags.
For one thing, as Liberum highlighted in a note this week, credit in China is contracting significantly, on several levels. Levels of debt taken out by households, by local government and by corporate entities is all either contracting or flat. This speaks in part to the Chinese government’s power to control events in a way that no other country in the world can. Risks of a debt-fuelled bubble in China are markedly reduced.
But as the first great capitalists in those Italian banks realised all those centuries ago, debt is what really fuels growth. Too much of a constriction in China and the buoyant levels we are enjoying on the FTSE at the moment would soon drop away. Miners would be hit hardest and fastest.
And there’s more. The power the Chinese government has also leads to its own type of uncertainty. Recently imposed restrictions on the importing of waste for recycling have left some countries scrambling for new solutions to their waste management solutions.
China will not become the dustbin of the world, runs the refrain. But inside the country, the urgency of that statement is as clear as the air itself.
If Chinese growth and year after year of strong PMI numbers comes at the expense of the very air the Chinese people live in and breathe, then ultimately it may not be economic factors that draw a line under the new cycle of global growth. It may in fact be social.
If Chinese industry increasingly has to shut down in order to allow air to clear, then the urgency for cleaner environmentally-friendly technologies will only become greater.
Everyone knows there’s plenty of lithium in the ground, and yet still investors pile into lithium like there’s no tomorrow. Why are they doing this? - because there may not be a tomorrow, or to put it more rationally, because future of the global economic order may depend on it.