Via JPMorgan's CIO Michael Cembalest,
China is slowing, mostly due to a gradual, steady decline in private sector activity. One example: the decline in fixed asset investment (e.g., business capital spending) at private sector firms relative to firms that are state-controlled. Premier Li Keqiang’s reforms are aimed at making it easier for entrepreneurs to start private sector firms, but in the current climate, private sector investment growth continues to fall.
The Chinese central bank injected some liquidity into the domestic banking system recently, but it was only for 3 months and not meant to address the more structural issue of declining private sector demand. While export growth and job creation still look pretty good, the overall picture is one of an economy growing at 7%, and that’s with the contribution from government spending. Government spending is set to slow in the second half of the year; the authorities continue to reduce the size of the shadow banking system which extends credit; and the overheated housing market is still in decline as well when looking at national home sales and a 70-city home price average.
We expect continued weakness in Chinese data for the rest of 2014 and into next year as well.