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Unofficial readings on China’s industrial activity released on Thursday add to a sense that the underlying economic vibrancy of the world’s second largest economy may have continued its ebbing trend into October.

This may surprise those who bought into the notion that industrial output rebounded strongly in September, rising to 8 per cent year on year, up from 6.9 per cent in August. In fact, though, that September “rebound” was largely the result of a big statistical base effect, according to China Confidential research.

Similarly, the announcement on Thursday of a pick up in HSBC/Markit’s manufacturing Purchasing Manager’s Index (PMI) to 50.4 in October so far – up from 50.2 in September – is misleading. In fact, readings on manufacturing output and new orders – the key measures of industrial vibrancy – revealed markedly weaker trends. 

Last month Ricardo Hausmann, a normally mild Harvard academic, set off the equivalent of a financial bomb. The economist suggested that Venezuela had already defaulted on many of its suppliers, its oil service contractors, and its citizens. So who or what might come next?

When Hausmann suggested Wall Street, the market reaction was huge. Indeed Venezuelan bonds, undercut by the falling oil price, have been dropping ever since. Yet it turns out that Venezuela’s latest default has been, in fact, to China. Given that Beijing is one of Caracas’ closest allies, this is surprising. It is also bullish for Wall Street. 

In a private meeting with the US Ambassador to China in 2007, provincial Communist Party secretary Li Keqiang described his country’s GDP figures as “man-made” and unreliable.

To get a good idea of what was happening to the economy in his province of Liaoning, Li said he preferred to focus on three alternative indicators: electricity consumption, volume of rail cargo and the amount of loans disbursed.

All other figures, and especially GDP statistics, were “for reference only”, Li told the Ambassador, with a broad smile on his face. 

GDP growth. Third-quarter growth could be the slowest since the depths of the global financial crisis, when China reported 6.6 per cent growth in the first quarter of 2009.

A reported export surge in September is failing to dispel the gloom suffusing forecasts for China’s third quarter GDP growth, which several economists predict will slump to a five-year low.

One problem lies with the export numbers themselves, which raise suspicions that over-invoicing may once again be artificially inflating export statistics as Chinese smuggle hot money into the mainland from Hong Kong to take advantage of an appreciating renminbi. 

China corruptionEmerging market (EM) currencies have tumbled against the US dollar over the past three months – with a single exception. Not only has the renminbi resisted kowtowing to the resurgent greenback, it has strengthened against it even as the currencies of its BRIC counterparts – the real, the rouble and the rupee – have fallen 7.8 per cent, 14.3 per cent and 1.6 per cent respectively since July.

This raises an obvious question: for how long can the renminbi refuse to accept the US dollar renaissance? 

Enthusiasm over Narendra Modi’s election in India and fears that Dilma Rousseff may be re-elected in Brazil have prompted a sharp reversal in the two countries’ positions among equity fund managers.

Source: Copley Fund Research

According to a report published on Monday by Copley Fund Research, which tracks the investments of 100 global EM equity funds with $280bn of assets under management, India overtook Brazil in September to become the second biggest EM after China in terms of aggregate country holdings, with $31.6bn in AUM, ahead of Brazil’s $29.6bn. 

A surge in fake invoicing is once again inflating China’s export figures, according to a survey, raising questions over a mysterious recent ballooning in Beijing’s trade surplus and suggesting that inflows of hot money may be rising.

A survey of executives at 200 export companies, trading firms and shipping agents in China in September revealed a spike in the number of respondents who think over-invoicing of exports is resurgent (see chart). The levels are reminiscent of late 2013, when hot money inflows prompted a managed depreciation of the renminbi. 

By Andy Rothman, Matthews Asia

China’s housing market is one of the most important parts of its economy, and also one of the most misunderstood. This sector is important because residential real estate together with construction last year accounted directly for about 10 per cent of GDP, 18 per cent of fixed-asset investment, 10 per cent of urban employment and more than 15 per cent of bank loans. It is also misunderstood because few observers appear to grasp the structure of China’s residential market. 

China stepped up its efforts on Tuesday to transform doomsday scenarios for its domestic property market into merely another round of déjà vu. The central bank reinforced efforts to boost mortgage lending by banks, building on the small but significant turnaround that beyondbrics noted in mid-September.

The new policies allow buyers who already own one home but have paid off their mortgage to be considered as first-time buyers, thus qualifying for a mortgage downpayment of 30 per cent of the cost of the loan. Previously, they would have been considered as second home buyers and had to pay a downpayment of at least 60 per cent. 

Official statements on bad loans in Chinese banks come with a health warning: analysts widely believe they understate the real level of delinquency by a wide – though unknowable – margin.

Nevertheless, official statistics can be helpful in assessing whether the problem is deepening or alleviating. In that context, an analysis published on Thursday by EY, the accounting firm, shows stress levels rising rapidly among China’s top banks. 

A closely-watched indicator of economic activity in China is showing an unexpectedly robust reading for September, according to an announcement on Tuesday. But is a real growth rebound underway, following several signs of a slowdown in the third quarter so far?

Hong Kong stock market investors appeared to reserve judgement, allowing the Hang Seng index to slip 0.49 per cent, or 118 points on Tuesday to 23,837. Economists and other survey-based indicators of Chinese economic activity reinforced the skepticism. 

By Alastair Campbell and W. John Hoffmann, Exceptional Resources Group

The “rule of law” is set to dominate China’s key Communist Party plenum in October, Xinhua, the official news agency, has said. The rule of law is a “must” if the country is to attain “economic growth, clean government, cultural prosperity, social justice and a sound environment”, Xinhua added.

Many observers would agree. Some may even believe that China is about to embrace a Western-style system in which all actors – the government, institutions, companies and individuals – become subservient to an independent legal code. But what, in practice, is the renewed focus on rule of law likely to mean for China’s development? 

There is more gloomy news for the world’s second largest economy. A comprehensive official survey of Chinese households, businesses and banks finds demand for loans slackening further in the third quarter, suggesting scant prospects of a reprieve from the credit slump seen in August and July.

Some 3,100 banks interviewed by the People’s Bank of China (PBoC), the central bank, reported a significant easing in loan demand among all three categories of firms – small, medium and large – for the third quarter, which ends at the end of September.

The loan demand index fell to 66.6 per cent, down from 71.5 per cent (see chart). The muted demand for loans is set to create headwinds for the PBoC’s initiative this week to boost economic growth by injecting Rmb500bn ($81bn) into the five largest state-owned banks, economists said.