As previously discussed, Chinese monetary trends suggest that economic growth has bottomed and will pick up significantly from end-2015. The OECD’s Chinese leading indicator supports this scenario.

The OECD presents its country leading indicators in “ratio to trend” form, i.e. a stable value indicates that an economy will grow at its trend pace. Its latest release refers to “tentative signs of stabilisation” in China. This somewhat underplays the positive signal because 1) Chinese trend growth is high so a return to this rate of expansion would represent a significant strengthening and 2) the ratio to trend indicator actually rose, rather than remained stable, in October, the latest month.

While the OECD prefers the ratio to trend presentation, it also calculates a leading indicator of the level of Chinese industrial output. The chart compares six-month and rescaled one-month changes in this indicator with the six-month change in output. The six-month indicator change has been firming gently since early 2015, while the one-month rise in October was the largest for two years.

The leading indicator comprises six components: production of chemical fertilizer, crude steel, buildings and motor vehicles, overseas orders from the PBoC’s quarterly survey of industrial enterprises and Shanghai stock exchange turnover value. The recent pick-up appears mainly to reflect stronger steel and vehicle production, along with a recovery in stock market turnover. Since the components are non-monetary, the positive signal is independent of better money / credit trends.

The stabilisation / recovery in the ratio to trend indicator suggests that annual industrial output growth will rise to about 8%, the OECD’s current estimate of trend. This compares with 5.6% in October, with a November number due shortly. One caveat: the OECD revises its leading indicators monthly, so another month or two of data are needed to confirm a change of direction.