January CLIEAC indicates economic contraction in China
by Four Elements Capital
This report presents the January 2019 update on the Commodity Leading Index Economic Activity China (CLIEAC, see Appendix for index description).
Contraction As indicated by our CLIEAC, the Chinese economy continues to contract. In 2018, China’s GDP growth came in at 6.6%, its slowest pace in 28 years. Manufacturing conditions are stable, as reflected by the PMI figures (Caixin/Markit PMI down from 49.7 to 48.3; NBSC PMI up from 49.4 to 49.5). December’s trade data shows exports fell 4.4% yoy, the biggest decline in 2 years. Imports also contracted 7.6% yoy, the largest drop since July 2016. RMB is stable against the basket of currencies of main trade partners over the month. Correspondingly, as shown in the Swirlogram, the CLIEAC places overall economic activity in a Contraction mode. The monthly index average moved by -0.11 over the month to -0.44 (one year range is -0.44 to 0.73). The current quarter average of -0.44 is below the previous quarter average of -0.12 and below the yearly average of 0.3.
Note: The values of the previous quarters reflect the index average for the entire quarter. The values of the current quarter reflect the index average for the current quarter up to the date of the report release.
CLIEAC Components Over the previous period 4 component of the CLIEAC increased, 4 remained within the momentum range of +/-0.3 standard deviations (s.d.) and 6 decreased. Less than half of the components (6 out of 14) remain above their long run average of zero. On the positive side, Foreign Direct Investment experienced the largest increase of +1.51 s.d., followed by Fixed Asset Investment Real Estate and Electricity Production. On the negative side, Exports exhibited the largest drop of -0.95 s.d. followed by Fixed Asset Investment Manufacturing.
Nowcasting GDP The CLIEAC has been a good indicator for overall economic activity as measured by yoy GDP growth. Using the CLIEAC as predictor in our nowcasting model substantially improves estimates of current quarter GDP relative to the benchmark autoregressive (AR) model. Based on current economic activity as reflected by the CLIEAC, the point estimate for the first quarter in 2019 yoy GDP growth is 6.34% with the lower and upper 90% confidence bounds at 6.12% and 6.55% respectively.
Note: While the previous sections present the seasonal trend adjusted version of the CLIEAC, the nowcast of the year-on-year GDP growth figure is based on the year-on-year version of the CLIEAC.
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Appendix: Index Composition
The Commodity Leading Index Economic Activity China (CLIEAC) is a composite index that provides a measure of overall economic activity in China. The index consists of a equally weighted basket of components which reflect fundamental data related to economic activity. Each index component is Chinese New Year calendar effect-, trend- and seasonally adjusted, smoothed, normalized and updated in the index as new data becomes available. The rolling standard score (Z score) approach is applied to normalize each component before aggregation. As such, a reading above zero indicates expansion and below zero contraction of economic activity relative to the long-run average. Upwards and downwards movements of the index indicate improving and deteriorating economic activity respectively. The CLIEAC is composed of 14 components covering supply- and demand- side factors across five categories.
- Production: Electricity Production, Fiscal Revenue, Caixin/Markit and NBSC Purchasing Manager Index
- Transportation: Port Freight Traffic, Railway Freight Traffic
- Trade: Total Imports, Total Exports
- Consumption: Retail Sales, Real Estate Sales, Vehicle Sales
- Investments: Fixed Assets Investment Real Estate and Manufacturing, Foreign Direct Investments
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