Despite the Index’s fall remaining front page news, this week’s Chinese GDP result quietly threatens to show signs of a slowdown. The result is forecast at 6.9% but in an economy that has suffered some significant shocks of late, the market is likely to watch the result closely. A close examination of the GDP figure is likely to provide a window to the health of the $10 trillion economy amid rumours that domestic demand is slowing dramatically.

Infrastructure Investment

Local government fiscal expenditure rules were tightened late last year in an attempt to rein in spending and debt accumulation by the local bodies. However, those rules were again relaxed in recent months so that provinces and local councils could increase their borrowings and infrastructure spending. This has allowed the provinces to keep spending at a breakneck pace on high speed rail and freeways. Subsequently, infrastructure spending is a key component of Chinese GDP and in the prior five months registered a decline to 18.1%, down from 25% in the prior year.

Property Sector Recovery

Real estate has always been a solid indicator of Chinese expansion as the asset class is perceived as a long term growth strategy. The recent falls in the and Shanghai property markets have been indicative of a general level of declining confidence. Fixed asset investments slowed to 5.1% over the past five months, a significant fall from 2013. However, it appears that the boom is back with real estate in the two cities rising again, but it will remain to be seen if the sector is in recovery or if it will continue to weigh upon growth.

Employment Figures

Employment is always a tough metric to use to gauge the health of the Chinese economy, as it often is relatively unreliable. However, the Chinese Premier has reiterated the fact that employment data moves policy decisions, not GDP output. This statement is indicative of the Government’s current policy to create 10 million jobs this year. Unemployment in May remained stubbornly around the 5.1% mark, even as the economy took some hits. Subsequently, watch out for any weakening in the labour statistics as they may fuel the case for further stimulus from the PBOC.

GDP Deflator

Growth has officially remained closely around the 7% level which gives the impression of great stability in output. However, the released figures are unadjusted for the effect of inflation and, when this is included, it shows strong volatility. Subsequently, it pays to take the current reported growth data with a grain of salt.

In fact, in many cases inflation is a better indicator of growth and if we review the GDP deflator we find that inflation actually fell into negative territory this year. Obviously, this is indicative of the declining commodity prices but it also shows some diminishing domestic demand. The subsequent decline in the deflator also appears to match the point at which the Chinese Central Bank rolled out their stimulus programs. This economic indicator is one of the key metrics that you should keep a close eye on in the coming days.

Ultimately, I forecast Chinese GDP y/y to meet market expectations at 6.9%, as it always does. However, their economy is entering a period of diminishing trade demand and this is likely to weigh upon growth in future quarters. Also, the risk of slowing domestic demand should not be understated especially for those holding currencies whose economies are exposed to Chinese demand.