“Give me a one-handed economist! All my economists say, 'on one hand ... on the other.'” — U.S. President Harry S. Truman

On the one hand, China market sentiment and performance are weak. On the other hand, macroeconomic conditions and corporate earnings are strong. This great China disconnect is likely to narrow, although it isn't possible to say exactly when that will happen.

Macro data published last night for the third quarter reflects a healthy Chinese economy, driven by domestic demand, limiting any leverage the Trump administration believes it will gain via tariffs. Beijing has not undertaken significant stimulus, but will do so if the tariff dispute escalates into a trade war.

MARKET WEAKNESS, CORPORATE STRENGTH

The Shanghai Composite Index was down by 25% year to date through October 18, but corporate earnings growth remains healthy.

For larger Chinese industrial firms, including many that are not listed on a stock exchange, profits rose 16.2% year-over-year (YoY) during the first eight months of 2018, compared to 21.6% during the same period last year. This slower, but still quite strong, pace is due in part to a tough base, and remains significantly better than the same periods in 2016, when earnings rose 8.4%, and 2015, when earnings declined 1.9%.

Industrial margins in the first eight months of this year are at the highest levels in eight years for the same period.

Industrial value-added rose 5.8% in September (vs. 6.6% a year ago), and 6.4% for the first three quarters (vs. 6.7% during the same period last year), reflecting a cooler but still healthy manufacturing sector.