Chinese industry – doing worse & better than the headlines say

I don’t like monthly YoY data. For sure it has its advantages, in particular seasonality is normally dealt with. 1 But as a guide to what happened in the month in question it it rather lacking.

Chinese industrial production, an important datapoint for commodity demand (and the wider global economy), is normally reported as a YoY series. This has slowed steadily, and in October was just 4.7% higher YoY, a sharp slowdown from the 5.8% growth seen in September (grey line in 1st chart). However it remained higher than the low of 4.4% seen in August.

The probem with a YoY series is we don’t know whether October was a bad month, or October 2018 was a very good month, and similarly how it compares to September.

Luckily for IP, China also publishes a seasonally adjusted month-on-month (MoM) series. It doesn’t get much attention but in theory should give us a much more accurate read on how the industrial sector is doing at the moment. If so it looks very bad news – October saw growth of just 0.17% a month. This is the lowest monthly print I can remember, and as the following chart shows certainly the lowest in the last three years. If maintained for the next 12 months Chinese YoY IP growth would be just 2%.

But the chart above also shows something else – the seasonally adjusted monthly growth rate appears rather…seasonal…especially in 2019. The first month of each quarter has been weak, and the last month strong. As such it looks like November’s print is likely to be around the same as in 2018 and December’s much stronger than in 2018. This would mean the YoY rate should stay around the same in November and rise strongly in December.

There lies one more complexity. The YoY rate derived from this monthly data does not equal the YoY rate reported by the NBS. The first chart shows the former in grey and the latter (headline) in blue. Even with the weak October monthly print the derived YoY remains above 5.5%.

Where does that leave us? Chinese IP growth is slowing, though the YoY series might overstate the severity of the slowdown. October was a bad month, but November and December are likely to be better given the 2019 pattern so far. Given so much confusion I cling to my chart of YTD growth in industrial production derived from the monthly data. The pattern is less smooth this year but overall output has grown much the same as in 2018.

Notes:

  1. An obvious exception being shifting annual holidays such as Chinese New Year or sometimes Easter

Global EV sales firmly in reverse

A slump in Chinese electric vehicle (EV) sales drove global EV sales into reverse in October. I estimate, using national and other sources, that 130k EVs were sold during the month (140k if you include Chinese commercial vehicles), 32% lower YoY, with both battery-electric vehicles (BEVs) and plug-in hybrids (PHEVs) down a similar amount.

The sharp global YoY fall is partly because in previous years sales have risen into year-end on a combination of beating expiring incentives and a generally rising market. But sales last month were also lower MoM, and while this owes something to wider market trends, it is mostly due to China.

In China, which accounted for 64% of global EV sales in October 2018, EV sales were 54% lower YoY, with BEVs down 47% and PHEVs down 78%. The following chart shows this is not primarily related to a weakening wider market (all passenger car sales were down, but a more modest 6%) but a sizeable fall in market share. The reasons for this we’ve discussed many times before, and are mostly subsidy-driven, though the extent of the slump does point to some consumer disenchantment. Sales for the full-year are now only 18% YoY higher YTD and could end the year lower than in 2018.

If we exclude China then global EV sales were still slightly higher YoY, though note not by much.

The only bright spot at present is Europe (see my earlier post), where sales were more than 50% higher YoY. And while total EV sales in Europe were still lower than China in October (48k to 56k) the gap has narrowed considerably, and in terms of market share of all car sales Europe has now been higher for two months. Of course this owes something to the Tesla Model 3 roll-out, which is likely to subside, but it does suggest the dominance of the Chinese market in sales is not as obvious as once seen (of course production & battery manufacturer are different questions).

I’ve not said much about the USA, and for two good reasons. One, sales seem subdued, with Tesla concentrating on foreign markets. Two, we are lacking accurate data. The sterling work done by sites such as www.insideevs.com and www.cleantechnica.com in assessing this continues, but a decision by most manufacturers to switch to quarterly data 1 means much monthly data is now guesswork, and for PHEVs I’ve had to make an extrapolation on previous trends. This won’t make a change to our global conclusions – the US does not have a big enough market – but it does mean we need to be cautious on assessing the micro-trends.

My view on the longer-term outlook remains the same. The current slump is a reminder that technological shifts are rarely smooth, and some of the reasons for it (subsidy-issues, consumer reluctance) also point to why EV roll-out will be slower than the more bullish predictions. But subsidies are not all one way – the German government recently announced more generous ones – and consumer reluctance will be overcome by a wider and better range of models. And 2020 still seems a crucial year for that.

Notes:

  1. There is no national or govt tabulation as in many other countries

Chinese gold imports remain subdued

China imported 62t of gold in September, according to recently released customs data. This is slightly down on last month, above the lows of summer, but subdued compared to earlier in the year and in 2018.

Source (this and all other charts): China Customs, SGE, Matthew Turner, October 2019

Gold imports in the first nine months of the year have totalled 760t, more than a third lower than the 1,242t seen at the same point of 2018.

Of course one factor is the much higher gold price, with western ETF investors bidding up the price.

But in terms of value of gold imported 2019 is also proving a weaker year than 2018, and even, since the start of summer, with 2017.

Is this something for the bulls to worry about? This Reuters story placed the blame for the very weak summer period on quotas restrictions aimed at restricting the outflow of Yuan. These were apparently eased in August, helping explain why imports have picked up a bit. Presumably at the LBMA conference in Shenzhen more was said about this. Such restrictions do suppress gold demand but if only temporary are unlikely to do lasting damage.

Furthermore there is a real sense, despite all the talk of gold being a 200,000t “stock” market, that if ETF investors are buying a lot of gold, the Chinese can’t have as much. The price rises to see who wants it most. So it’s certainly not as concerning as it looks.

Nevertheless it remains concerning. The biggest risk to the gold market medium-term, in my view, is lacklustre”physical” demand, of which over 50% comes from China and India. In particular it seems to me that gold – both as a consumer good and an investment good – now faces far more competitors (eg smartphones, index-linked bonds) than it once did. Of course some of its qualities are unique and it has a long track-record, suggesting a certain robustness. But it pays to not be complacent.

For the background on how China now publishes gold trade data see my LBMA Alchemist piece from earlier this year.

Chinese industry recovers as expected

Last month I suggested that Chinese industry was not doing as badly as the August year-on-year (YoY) series suggested, a rise of just 4.4%. This was because the seasonally adjusted month-on-month (MoM) series, theoretically a much better guide, implied a higher YoY rate of 5.5%.

September’s data was released today and shows the YoY series rebounding more strongly than market expectations, now up 5.8% YoY.

In part this was because September saw a strong 0.72% MoM increase.

Source: NBS, Matthew Turner, October 2019

But it also looks like some catch-up with the implied YoY series.

Source: NBS, Matthew Turner, October 2019

Year-to-date (YTD) Chinese industry is actually slightly outperforming how it did in 2018 using this MoM data*.

* Of course one might not believe any of the data series.

October EV sales continue lower YoY

Globally 170,000 electric vehicles (EVs) were sold in September, 11% lower YoY, with pure EVs (BEVs) falling YoY for the first time. This I calculate using national data released in the last two weeks.

Regionally there was a very strong performance in Europe, where YoY sales were up 82% YoY (note revised from 75% in the linked article), boosted by pent-up sales of Tesla’s Model 3. However in the USA weakening sales of the Model 3 compared to its own, earlier, 2018 boost was a major factor in EV sales falling 26%.

But the biggest impact on the global numbers remains China, and there sales of EVs were very weak, down 34% YoY. With China accounting for around half of global EV sales in September 2018 (and still more than 40% in September 2019) this clearly dragged the global total down.

All Chinese car sales were down 6% YoY, but the slump in EV YoY is more due to reduced subsidies and perhaps some signs Chinese consumers are worrying about value for money, especially resale value. It’s also exacerbated by the strong start to the year and the exceptionally strong end-year performance seen in both 2018 and 2019, which seems missing this time around.

CBGA ends amid a changing world of official sector gold

Today marks the last day of the European central bank gold agreement (CBGA).

Announced on September 27 1999, and renewed at five-year intervals up to 2014, this was often described as a pact to limit central bank gold sales and lending, though arguably its main role was to improve market conditions sufficiently to give space for hefty European sales. From around the mid-2000s European central banks lost interest in selling gold, and as such the pact became rather pointless, the main reason why in 2019 it wasn’t renewed.

Central bank’s attitudes to gold have changed significantly since 1999. Back then global central bank gold holdings still largely reflected the relative economic strengths of countries at the end of Bretton Woods era (1970s). 85% of the world’s 30,300 tonnes of official gold (excluding that held by the IMF & BIS) was owned by the “Advanced Economies”, and almost all of that, 80% of the world, by the USA and Western European countries.

This geographical skew can be seen clearly in the following map, where I’ve resized the countries of the world by their official gold holdings – shows this clearly (ignore the colours)

Central bank gold holdings by country, September 1999 (source: IMF, Matthew Turner)

Fast forward 20 years and a map redrawn to reflect August 2019 gold holdings and at first glance nothing much has changed – the USA and Western Europe still dominate, even if the latter is somewhat smaller.

But look a little more closely and now Russia and Asia are far more visible.

Central bank gold holdings by country as of August 2019 (source: IMF, Matthew Turner)

This is because there has been a slow shift since the first CBGA was signed in 1999. The “Advanced economies” have sold nearly 4,000t, mainly through the CBGA – with gold holdings in the Eurozone down nearly 1,800t, in Switzerland 1,580t, and in the UK over 300t. Their share is now 70%, down from 85% in 1999. But globally gold held by central banks is up around 1,000t – because “Emerging and developing” economies have added nearly 5,000t. Russia and other CIS countries have been at the forefront of this, but China has also increased its reserves dramatically, and so have a reasonably wide range of other countries, including India, Mexico, and Thailand.

This shift is likely to continue. Certainly central banks are still buying, as noted in Tuesday’s post, with 1H 2019 seeing a record amount. This trend has many drivers but a slow – very slow – loss of faith in the US dollar seems behind some of it, not just in Russia. We’ve not seen any evidence of European selling resuming, indeed the main activity there purchases this year and last by Hungary and Poland. However I would think in another 20 years Western European gold holdings will be lower than they are today.

August: central banks keep buying gold but some signs of fatigue

One of the reasons to have been bullish gold over the past 12 months was an apparent step-change in central bank purchases. Not just were traditional buyers such as Russia and China continuing to add to their holdings, but new names were getting involved, including – gasp! – even European central banks.

But after a tremendous 1H, in which net purchases reached nearly 400t, or 65t/month, there does seem to have been a slowdown in recent months. From latest IMF data (and direct central bank publications where necessary) I estimate 22t was purchased in July, and just 16t in August. The YTD total is now 423t.

It is likely these numbers are revised higher. Many countries report late, and given a general bias towards purchases this should mean more to come. In particular Turkey, which has added roughly 9t/month this year, hasn’t yet reported for August. Furthermore central bank gold buying has always been lumpy, for example Poland’s 100t purchase this year mostly in June, and so you do get quiet months.

Nevertheless even those buyers who were buying bought less, with just 11t from Russia and 6t from China in August. Furthermore Uzbekistan has sold quite heavily in recent months. The very high gold price, particular in non US dollar currencies, is perhaps having an effect.

How bad is Chinese industry?

Chinese industrial production (IP) growth slowed in August to just 4.4% Year-on-Year (YoY), which is a 17-year low.

Source (this and all charts): National Bureau of Statistics

We need to keep in mind that this data is not seasonally adjusted and can show some wild swings. This is especially true in February and March, when the shifting dates of Chinese New Year have a large impact. Only five months ago in March 2019 IP growth was reported as up 8.5% YoY, clearly an aberration.

What we need is an estimate of the level of Chinese industrial production. But the National Bureau of Statistics (NBS) does not publish one.

What it does publish, however, is a seasonally adjusted month-on-month (MoM) growth rate. This too is rather odd, showing distinct seasonal patterns, but in 2019 has also been trending downwards. In August it was just 0.32% MoM, the slowest rate in the last three years and a mere 4% annualised.

The MoM series can be used to back out a level of IP, and from this an alternative YoY growth rate. It is noticeable this paints a less pessimistic picture than the official YoY series, showing in August a YoY rate of around 5.5%. But it is also true that this backed-out series has been higher than the official series for much of the last year, somewhat of a puzzle.

Interpreting Chinese data is never easy, even if you accept them at face value. From the NBS’s two series it seems safe to conclude IP growth is slowing, though perhaps not as severely as the YoY numbers suggest. On a YTD basis industry has expanded not much less than in 2018. But the last two months have been weak. September’s data will be interesting.

EV sales need a recharge

The impressive growth in global* electric vehicle sales came to an end in August, with a 9% YoY fall (updated from a 2% gain after the release of further data).

147k EVs were sold during the month: 111k battery-electric vehicles (BEVs), up 4% YoY, and 36k plug-in hybrid electric-vehicles PHEVs), down 34% YoY.

This slowdown in global sales growth can be attributed to:

  1. A fall in China post subsidy changes (down 12% YoY in August), which had also brought forward some sales. This matters as China still accounts for more than half of all EV sales.
  2. Slightly slowing growth in Europe (21% YoY in August) despite the Tesla Model 3 doing well, and, most important in August;
  3. A fall in USA sales as Teslas are diverted to other markets (down 24% YoY in August). An important caveat here: US sales data has become harder to compile in recent months as automakers have revealed less information and (building on www.insideevs.com efforts) I’ve had to estimate some of the smaller selling models. However there’s no doubt sales were lower YoY.

In terms of market share China remains ahead (though obviously some European states such as Norway are individually much higher). Canada’s share was boosted by high Model 3 sales. Europe’s continues to steadily rise, supported by generous subsidies.

Looking ahead, should the weak August numbers shift our longer-term expectations?

Yes, and no.

Yes because it seems unlikely 2019 global full year sales will be able to match some of the earlier targets. YTD sales remain 35% higher, but if sales growth is flat from now until December it would end the year up less than 20%. And it is always risky to ignore actual data: what this year’s ups and downs have shown is that the market remains rather niche: subsidy driven and dependent it on new models.

But no because while subsidies will continue to decline, new model launches are going to multiply. In particular lower cost EVs from established manufacturers, including the potentially game-changing VW ID3 (shown at this week’s Frankfurt motor show) will finally come on to the market in 2020. Ultimately this is what will drive EV market share higher.

Sources: USA – www.insideevs.com, Europe – national car & dealer associations, China – CAAM, Canada – Matthew Klippenstein. * Global = China, USA, Canada, Europe and Japan (Leaf only).

Weak Chinese gold imports nothing to worry about…for now

Chinese gold imports were weak again in July, 43t, and the YTD total is now just over 600t, compared to over 1,000t during the same period of 2018.

Is this something for the bulls to worry about? This Reuters story places the blame squarely on quotas restrictions aimed at restricting the outflow of Yuan. If correct this will be artificially suppressing gold demand, but history suggests such periods don’t last long. And it makes sense that if ETF investors are buying a lot of gold, the Chinese can’t have as much. That’s why the price rises. So it’s certainly not as concerning as it looks.

Nevertheless we must continue to pay attention to it. The biggest risk to the gold market medium-term, in my view, is lacklustre”physical” demand, of which over 50% comes from China and India. In particular it seems to me that gold – both as a consumer good and an investment good – now faces far more competitors (eg smartphones, index-linked bonds) than it once did. Of course some of its qualities are unique and it has a long track-record. But that might not be enough.

For the background on how China now publishes gold trade data see my LBMA Alchemist piece from earlier this year.