China's economy is boring, but that's not necessarily bad for investors.

Boring because manufacturing, investment and exports are weak. But consumption and services, the largest part of the economy, are healthy, and employment is stable. The government seems prepared to tolerate boring, rather than turn to stimulative monetary and fiscal policy. Domestic investors also don't seem to mind being bored, with the Shanghai Composite Index up 18% from the start of the year through July 15.

Anxiety leads to boring results

Two sources of anxiety are leading to a boring economy. The first is tensions with the Trump administration, which have led China's business community to reduce output and defer investment. Real (inflation-adjusted) industrial production rose 5.6% year-over-year (YoY) in the second quarter, down from 6.6% in 2Q18. Nominal investment by privately owned companies rose 5.3% in the second quarter, down from 6.4% during the first quarter and 8.7% in 4Q18. (It is worth noting, however, that corporate investment is slowing globally as well.)

Corporate demand for credit is similarly weak. During the first half of the year, mid- to long-term loans to companies, a reflection of investment spending, accounted for only 36% of all new loans, down from a 53% share in the first half of 2017, when the manufacturing sector was stronger.

The second source of anxiety is the Chinese government's ongoing campaign to reduce risks in the financial system, which has led to a sharp crackdown in off-balance sheet, or shadow credit, which declined 8.4% YoY in June. This has reduced systemic risks, but has also meant that the firms that relied on non-standard credit sources, especially small private companies, have struggled (even more than usual) to get access to credit.