We believe that China is key to the global reflation story playing out for longer. Our new China GPS economic indicator helps explain why. It’s the latest in our suite of GPS indicators intended to give a forward view on growth expectations, which tend to drive financial markets, and it implies a positive outlook for China’s near-term growth outlook.
Over the past five months, our broader G7 GPS indicator has consistently signaled a brighter economic outlook than the consensus view of economists—just as global reflation has become a more dominant theme in the markets—suggesting more scope for upgrades. A better-synchronized global recovery is making the current bout of economic reflation more self-reinforcing, with China’s recovery and Europe’s surprising pickup now feeding through.
With the China GPS, we created a similar gauge of the three-month growth horizon but focused on the Caixin/Markit composite PMI. As the chart below makes clear, China has staged a sharp recovery over the past year after the 2015 slowdown. The GPS suggests that China’s composite PMI can climb further from current levels, with the momentum of this upswing showing no signs of fading yet. We expect a steady expansion ahead in China, with room for upside surprises.
Loose policy has played an important role supporting China’s growth in the past few years, especially with the recovery from the 2015 slowdown. Stronger domestic momentum and support from exports mean fiscal policy can step back for the time being. Easy financial conditions should keep domestic demand solid, with fiscal policy ready to respond to any setbacks. There are certainly risks to China’s growth outlook, including the country’s recent debt binge. However, we see debt as a slow-burning problem.
In our new Global Macro Outlook on China’s role in global growth, we also look at the interaction of growth in the world and China in the period since 2000 and find a few surprising results. In periods of reflation, we find the developed economy growth transmission to China and emerging market (EM) economies matters more—even as the magnitudes of the knock-on impacts have changed.
In other words, when developed markets enjoy a cyclical bout of reflationary growth, they have historically had a bigger growth impact on China and EM economies than when developed market economies are weak. Why so? China’s global trade links are more about exports than imports. Running a large current account surplus makes China a net seller of goods to the world. China’s buying abroad has historically been concentrated in commodities. Little wonder why China exerts such economic sway on EM commodity exporters. Our analysis implies that developed market reflation should reinforce the China-EM upswing.
Bottom line: We see the current bout of reflation having a bigger impact boosting activity in China and EMs, helping the global reflation story play out for longer. This is partly behind why we like Chinese and EM equities.