China Economic Weakness Deepens
Bob Iaccino of Path Trading Partners - - Fri Oct 19, 10:06AM CDT

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China’s Growth Domestic Product (GDP) was released last night and we may be seeing part of the reason the Dow, S&P 500 and the NASDAQ are under pressure. A potential global economic slowdown may have already been underway before the infamous tariffs went into effect. Chinese GDP came in at a slower than expected 6.5% rate of growth in the 3rd quarter measured against the 3rd quarter last year (YoY). Analysts had expected GDP to expand 6.6%, against 6.7% growth rate YoY for the 2nd quarter. This is China’s weakest YoY growth rate since the 1st quarter of 2009 which was during the global financial crisis. On a quarterly basis, GDP in the 3rd grew 1.6%, compared with growth of 1.8% according to the National Bureau of Statistics. Analysts had expected growth of 1.6 percent on a quarterly basis.

Behind the Data

It may still be too early to tell if this is a result of the U.S./China trade war. YoY GDP in the world’s second largest economy has been falling steadily since 2011, although it had stabilized starting in July of 2107.  Recent economic data have pointed to weakness in domestic demand with softness across factory activity and infrastructure investments in China’s. Their retail sales for September were also released overnight and beat expectations on a YoY basis and matched on a year to date basis. Prior data had shown a weakening trend in consumer spending. The main issue is the mindset of the Chinese consumer versus the U.S. consumer. There is no formal social security safety net for Chinese citizens which make them savers, unlike in the U.S. where the average consumer tends to be a spender. As of 2015, China’s gross savings as a percentage of GDP was 49.87% while the U.S. was at 18.18%. This is likely to be higher now as GDP has fallen, which in the past has seen the Chinese people save more. When they save, they don’t spend and if consumer spending slows more than it already has, the government will need to enact more stimuli to spark economic growth, or maybe come to the table with the U.S. and negotiate an end to the cycle of tariffs between the two nations. That development would put the Dow, S&P 500 and the NASDAQ right back on that bull, but until there is an agreement, get comfortable with volatility. 

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