Headlines so far aren’t doing this year’s zodiac much justice; live hog prices have spiked as China battles the repercussions of African swine fever. There is no vaccine for a disease that is highly contagious and fatal to pigs, though thankfully not humans. About 1 million pigs have been culled so far in an effort to try to control the spread.
News regarding the economy has not made for pretty reading either. Figures overnight indicated that year-to-date industrial output marked the slowest start to the year in a decade. Retail sales were similarly moribund compared to recent history, growing at their slowest pace since 2003. Such figures were not wholly unanticipated given China’s well-documented struggles with high debt levels, and increasing concerns over the likely outcome of the protracted US trade negotiations. Other headlines of late have only served to reinforce these concerns; aggregate January and February trade data showed exports and imports fell 5% and 3% respectively, compared to the same period last year. Exports reflect both the impact of US tariff threats and the more general waning of global trade. China’s neighbours are also impacted, with their manufacturing bases sensitive to the appetite of the Chinese consumer.
There is some evidence that the Chinese authorities’ efforts to mitigate the slowdown are having an impact, with bank loans and credit both at record highs in January. Whilst this may renew longer-term fears over the potential for the Chinese authorities to inflate the credit bubble, the rhetoric emanating from the National People’s Congress (which takes place this week in Beijing) continues to be suggestive of a government that remains keen to stimulate, and offset as much as possible, the domestic economic slowdown. The market’s focus will likely continue to be more on the shorter-term growth numbers, rather than what the eventual fall-out will be from a credit bubble bursting down the line.
The health of the Chinese consumer is certainly of greater importance to our core rates markets than in years past. Taking Germany as an example, it is clear that virtually all of the cyclicality of German growth typically comes from exports. In Germany, exports are a c.47% share of GDP, whereas in the US the equivalent figure is c.12%. A healthy Year of the Pig is not just of significance to China, but also to its trading partners.