China has further to fall

The chart below shows the year-on-year percentage change in my leading and coinciding indices for China.  A coinciding index is designed to follow the economic cycle, while a leading index is designed to lead the economic cycle.  In the chart, the leading index has been plotted with a nine months lag, so that its peaks and troughs approximately coincide with the cycle.  From 2014-2018, the leads were longer, and during China's repeated covid lockdowns over the last 3 years, they were shorter. 

The leading index appears to have troughed, consistent with recent shifts in monetary policy by the People's Bank of China.  But as always, these won't affect the economic cycle for several months.  It is likely that the real economy will only bottom in the middle of 2024. 

What does this mean for the world economy?  China's economic importance is overstated by its official GDP data, but I estimate that it is something between 10 and 15% of the world economy.  In my calculations, I use a weight of 11%, which is perhaps at the lower end.   This compares with the US at ~21%, the Euro Area/Zone of 17%, Japan at 6%, India at ~5% and the UK at 3%.  Because currencies move around a lot, these weights are based on PPP (Purchasing power parity) exchange rates.  (You might see news reports which give different weights, but these often use current exchange rates, which are volatile and can easily change direction.)

So, the US is embarking on a new economic upturn, Europe and the UK are still mired in recession, and Japan is beginning a slow recovery.  China's weak economy will retard world growth.  From an Australian perspective, it will also mean bad news for the prices of Australia's exports, including iron ore, which is already reflecting economic reality, and is falling fast.

China also faces major structural, long-term negatives for growth, but cyclical indices like my leading and coinciding indices aren't designed to pick these up.   Among the negatives China faces are its declining population, its massive housing crisis, and its continued skew away from private consumption.   Given these long-term structural issues, the traditional Chinese stimulus involving massive debt-financed residential housing and infrastructure development may not be feasible or even work.  

This chart shows the gap between the official GDP data and my GDP estimate.   My estimates, and those of other people, suggest that China's actual GDP is 1/3rd or more below its official level.  Note that my alternate GDP estimate is falling even though the government's estimate for GDP is still rising.