China data to be more correlated to dollar than equities

After the collapse in Chinese equities, many investors are concerned about another slowdown in China's growth profile as the wealth effect weighs on spending. 

Using China's data surprises as a proxy for growth, it is found that movements in the USD have often preceded movements in growth surprises. Given the importance of China'sexport sector and CNY peg to the USD, the relationship is logical.

"After Q2 GDP growth of 7% and better June data, 2015 GDP growth is forecasted at 6.8% y/y and look for an 'L' shaped growth profile this year", says Barclays.

Dollar strength in 2012 and 2013 preceded a period of weak China data, and the recent USD surge has coincided with a period of very disappointing data. The correlation between China data surprises and lagged USD changes (3m) is a strong 41%. 

China data also exhibit a positive relationship with the lagged Shanghai composite performance with correlation of 24%, but the correlation with the dollar is stronger. In addition, the beta to the dollar is larger. The stabilization in the dollar since March should remove one key headwind, although many others remain. 

From a seasonal perspective, China data surprises bottomed in May-June of the past three years.