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Jens Nordvig on China's rebounding economy

Last week, Opto Sessions hosted its latest Twitter Space with economist and macro expert Jens Nordvig. A previous guest on the show, Nordvig went deeper into his ahead-of-the-curve insights and how he gleans them, focusing on China’s reopening, its latest PMI data, and what it does and doesn’t reveal about the superpower’s current state of play.

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Jens Nordvig is the founder and CEO of Exante Data and MarketReader. An alumnus of Goldman Sachs [GS], Bridgewater Associates and Nomura [NMR], Jens’ macro analysis is globally renowned.

In the wake of China’s manufacturing activity recording its fastest growth in a decade, Nordvig discussed the state of the Chinese economy and what it means for stock markets. The full episode includes live questions from the audience and insight into the unique data that Nordvig uses to inform his outlook.

In the conversation, Nordvig reiterated his opinion—which he previously shared on the 2 February episode of Opto Sessions—that “the basic issue with China is that the official data is low-quality”.

As a result, at Exante Data, he looks “pretty much only at alternative data”.

In the last six months, he’s seen “incredible swings in economic activity” measured by those indicators, suggesting “a big bounce” over the next two to three months: something he predicted even before the latest PMI figures were released last week.

His alternative data, covering some 20 indicators like domestic consumption and mobility, is helpful for predicting economic change, but the market reaction is “a bit more complicated” to gauge.

Interestingly, while PMI data shows that consumption rose, industrial activity was down.

“This cycle is certainly not like any other cycle. In past cycles, China has been typically driven by aggressive government stimulus, [like] credit extension to state-owned enterprises.”

In the current period, the economic stimulus is a result of consumers getting back to work and spending. This makes it “more organic” than the stimulus which the authorities implemented during the pandemic when people were forced to stay at home, and as a result, their spending was constrained.

As such, it’ll move through the economy in a different way. In addition, it is likely to have a notable impact on sectors like tourism and restaurants, which had been starved of demand.

 “This cycle is certainly not like any other cycle. In past cycles, China has been typically driven by aggressive government stimulus, [like] credit extension to state-owned enterprises.”

On the other hand, it’ll have less of an impact on the industrial sector, which maintained activity and even grew during the lockdowns.

Some things “won’t be solved from one day to the next” and will remain significant challenges. These include a housing surplus and geopolitical tensions that are causing many companies to reroute their supply chains away from China.

Further to this, the bounce “is skewed towards services”. As a result, spending on goods is going down, and this is impacting the country’s export numbers.

“Since the export sector is so important to the Chinese economy, that's what makes the situation complex. They have had a big bounce in domestic consumption, but the exports are not in sync. So you actually have an offset from exports at the moment. And that's very unique to this cycle.”

A three-phase supply chain shift

In terms of production moving outside of China, Nordvig sees three potential phases in terms of the way that geopolitical tensions involving Russia, Taiwan and the US could impact the industry.

The first phase is already happening. Companies are observing the risks of basing their production capacity in China, whether these are lockdowns or geopolitical sanctions. Consequently, they are starting to move their factories to places like India, Thailand and Indonesia.

Phase two has to do with the country’s relationship with Russia and the crucial question of whether China will support it in its war against Ukraine.

“If there were a delivery of weapons from China to Russia… that could trigger sanctions, [as well as] repercussions down supply chains, because those sanctions might hurt certain companies’ ability to operate in China.”

Phase three would be a new war, with China attempting to invade Taiwan. This eventuality “would then lead to the most dramatic form of breaking supply chains that you can really imagine”.

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

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