If you look at the recent economic data coming out of China, it is clear the economy is in a bottoming process. The question is whether the measures used to keep the economy from sliding further are sustainable.
The most recent piece of data confirming the stabilisation in China is the HSBC Flash PMI print, which came in at 50.4, a 13-month high. Previously, non-manufacturing, retail sales and credit data had all shown China in a period of more rapid GDP growth after a fall to the lowest GDP growth levels since 1999. Below are a number of articles highlighting not just the recent print but also prior data releases and the ongoing debate about re-balancing and economic growth in China. In my view, the macro view these articles present show policy still trying to effect a re-balancing. But policy makers are finding that doing so is cratering growth and they are therefore going back to the well for the same unbalanced old trade-based economic model.
So, I believe the Chinese have arrested the economy’s hard landing by temporarily re-doubling infrastructure-based investment and a renewed focus on the export model. And whle the hard landing has been prematurely ended, the problems of readjustment remain. I agree with Michael Pettis that any re-adjustment to a domestic consumption-based economic policy model will involve even larger slowdowns in GDP growth. And the Chinese have understood this, which is why they have turned away from re-adjustment.
But the Chinese can only continue delaying for so long. Look at the credit conditions in China right now, with banks reducing loan loss provisions to hide the malinvestment already on the books and to keep the new credit binge in place. I see this as prima facie evidence that China is attemtpting to ride out the bad times by paering over the slowdown and prior losses with new credit (albeit from different sources and to different debtors). See the highlighted excerpts below. This will only increase the magnitude of losses and contraction in GDP growth down the line.
In conclusion, my view is that the Chinese may well have arrested the fall in GDP growth. But in doing so, they have not removed the risk but made the likelihood of a harder landing down the line even greater.
“Chinese banks are on course to make new loans worth more than 8.5 trillion yuan (US$1.4 trillion) in 2012, expansionary versus the 7.5 trillion yuan of new loans extended in 2011 and above the 8 trillion yuan that sources told Reuters back in February was the target for 2012.
Total social financing aggregate, a broad measure of liquidity in the economy, weakened to 1.29 trillion yuan in October, down from 1.65 trillion yuan in September, but still remained on track to hit a record 14 trillion yuan this year.
China also opened many previously-closed sectors to private investment with a view to funding new infrastructure projects and supporting economic growth without piling on more debt that local governments can ill-afford.”
“With a one-month exception in October 2011, the HSBC PMI — which largely reflects the private manufacturing sector — has remained stubbornly below the 50-point level separating accelerating from slowing growth since June 2011.
Unlike the patchy results seen in previous months, in November almost all the sub-indices in the HSBC survey concurred in showing an improving economy.”
“November manufacturing data shows the Chinese economy is recovering from its deepest slump since the 2008 global crisis”
“New Export Orders broke into positive territory but total New Orders are still slowing. SocGen also highlighted this. We’re not quite as certain as they are that the relatively weak domestic orders will be boosted by rising export orders, but perhaps we’re just quibbling.
What’s more interesting (and potentially confusing) is that the most recent official PMIs showed the opposite picture on orders: that total New Orders growing above-trend, but New Export Orders were below-trend. The official survey is more weighted towards big companies and state-owned enterprises, so the contrast with HSBC/Markit survey suggests that easing and stimulus measures are helping the SOEs, but probably not doing much for domestic consumption. No great surprises there, then.”
“The non-manufacturing purchasing managers’ index (PMI) rose to 55.5 from 53.7 in September, the statistics bureau said over the weekend.
Last week, China said its manufacturing activity had expanded for the first time in three months in October.
The figures come as China’s growth pace has hit a three-year low and ahead of a once-in-a-decade leadership change.”
“Industrial output growth rose to 9.6 per cent year on year in October from 9.2 per cent in September, while retail sales increased to 14.5 per cent year-on-year growth from 14.2 per cent.
Fixed-asset investment also picked up, as did newly started projects, an important predictor of future spending.
“The key question for investors is whether China’s economic growth has truly bottomed out. Based on October data… the answer is firmly yes” said Lu Ting, an economist with Bank of America-Merrill Lynch.”
“On average, China’s banks set aside 50 basis points of their loan books as impairment charges. A basis point is 0.01 per cent.
The cut in impairment charges comes at a time when many investors are expecting a spike in non-performing loans from the official 0.97 per cent rate. The NPL ratio in China’s entrepreneurial hub of Wenzhou has more than doubled to 3 per cent, according to state media.
Chinese bank officials deny there is a significant rise in bad loans, returning to their oft-repeated line that they are controlling lending tightly and have looked again at the books of borrowers who may be in danger of default.
“We’ve been very successful at controlling our credit risks,” said Zeng Jianhua, CCB’s chief financial officer, during a conference call with analysts on Tuesday. “We are confident our asset quality will remain healthy.””
“The mainland’s latest economic stimulus measures have exacerbated the already heavily laden balance sheets of provincial governments by encouraging them to take on more debt for infrastructure projects.
Massive spending on infrastructure projects is being undertaken by provincial governments, such as 829.2 billion yuan (HK$1.02 trillion) by Changsha, the capital of Hunan province, and a 3 trillion yuan stimulus by Guizhou province announced in July, despite the fact that provincial or municipal governments are still grappling with the legacy of the 4 trillion yuan package the central government launched between 2008 and 2010.”
“Industrial production, retail sales and fixed-asset investment all rose more than expected in October, from a year earlier.
Meanwhile, the inflation rate fell, giving room to policymakers to employ stimulus measures to support growth.
The numbers come as China’s growth rate has hit a three-year low.
Factory output rose 9.6%, while retail sales jumped 14.5%, indicating that domestic demand was holding up.
The growth in domestic consumption is key for China’s economy, as demand for its exports – one of the biggest drivers of its growth until 2008 – has taken a back seat amid a slowdown in its main markets of the US, Europe and Japan.”
“The latest figures have shown that GDP is increasing by 7.5%, the lowest rate since 1999.
George Magnus, a senior economic adviser at UBS Investment Bank, follows China closely and believes that China now faces its biggest economic challenge since the initial opening of the country in 1978.”
“Nick Lardy, an expert on China’s economy at the Peterson Institute, is arguing current growth rates can be sustained. Michael Pettis, a professor of finance at Peking University, is arguing a further sharp slowdown is inevitable. The opening exchange of views is posted below, with more to be posted next week.”
“Is China’s economic growth destined to plunge down to 3% to 4% a year, or can it be sustained in the current 7% to 8% range?
China Real Time has asked heavyweight experts Michael Pettis of Peking University and Nick Lardy of the Peterson Institute to argue it out in an exchange of letters.
The two issued opening statements last week. Their second exchange is below”