Asia Insights: China: Mixed signals from leading indicators

Fixed Income | Asia Ex-Japan
21 December 2012

Asia Insights: China: Mixed signals from leading indicators

· Nomura's China leading indicator fell in November, but we expect it to pickup in December (Bloomberg ticker: NMEICLI).

· Our heatmap continues to improve, with 67% of indicators positive in November, up from a revised 65% in October.

· We expect growth momentum to continue to build, and maintain our above-consensus GDP forecasts for 4Q and Q1 2013.

Nomura's China leading index (CLI) fell in November, dragged down mostly by three components – quasi money, steel production, and stock market turnover (Figures 1 and 2). However, we are not convinced that growth momentum is starting to flag. First, despite the drop in quasi money component, we think that credit and monetary policy remains loose, as total social financing excluding short-term bill financing was unchanged from October to November (China: Total social financing data signal continued loose monetary policy, 11 December 2012). Furthermore, China’s stock markets have been sluggish in past quarters, but there appears to have been to be a sliver of light in recent weeks. For the past 14 trading days, stock market turnover grew by 52.8% y-o-y, versus a decline of 43.5% in November. On a year-on-year basis, crude steel production growth was stronger in the first ten days of this month than in November. These data suggest that the decline in the Nomura CLI may be temporary. We expect it to pick up in December as stock market turnover has increased substantially.

More encouragingly, our other proprietary indicator, the heatmap, which tracks 31 indicators and gauges economic momentum, continued to improve in November. Of the 27 indicators currently available for November, 67% were “hot” (which indicates a pick-up of year-on-year growth from the previous month), from a revised 65% in October. On a smoothed 3-month moving average basis, 61% of heatmap indicators were positive in November, up from a revised 57% in October (Figure 3).

Mixed signals from leading indicators are not rare, especially around the turning points of business cycles. With the HSBC flash PMI still on an uptrend in December and the Central Economic Working Conference setting the tone of continued monetary policy easing, we believe that growth momentum will continue to build, and expect GDP growth to rebound to 8.4% in 4Q 2012 and remain robust at 8.2% in 1H 2013.