RBS: China's Economy: Slowing Distorted And Debt-AddictedVW Staff
China’s Economy: Slowing Distorted And Debt-Addicted by RBS Economics, SlideShare
China – The problems behind the headlines
China’s economy is:
- Slowing — GDP growth has slowed more than the headline figures suggest, investment and production in particular
- Distorted – overly reliant on investment with little sign of rebalancing
- Debt-addicted – a post-crisis debt build-up that is proving hard to shake off
- Coupled with ad-hoc and uncoordinated policy we believe China is more likely in a hard landing than a ‘bumpy landing’.
GDP growth – always on the money
- China’s GDP growth figure always comes in remarkably close to target
- And it’s never revised
- By the admission of the Prime Minister GDP data is “unreliable”
- It’s difficult estimating China’s ‘true’ growth rate
- But a figure of around 3-4% seems reasonable.
But investment has slowed sharply
- China’s post-crisis investment boom is unwinding.
- Demand weakness at home and abroad, as well as existing excess capacity, has dented manufacturing investment growth.
- The property market is starting to work through the inventory overhang. But property investment has stopped growing.
And so has industrial production
- All the years of excess investment has left a legacy of excess capacity.
- And the slowdown in investment means China’s heavy industries are having a tough time of it.
- Electricity, cement and steel production are all experiencing y/y declines.
The disinflationary winds blow -5
- And all that excess capacity is weighing down on prices.
- Producer price deflation is running at close to four years.
- And tellingly the GDP ‘deflator’(a wider gauge of prices in the economy) has turned negative.
- Domestic price falls and a falling currency means significant disinflationary winds are blowing from China. Those ‘made in China’ goods are getting cheaper.
Exports and exporting excess capacity
- Chinese exports are struggling.
- And the volume of Emerging Asia (predominantly China) exports have been declining since the spring of 2015.
- But China’s steel exports have doubled in just two years.
- It’s a symptom of the build-up of excess domestic capacity and is driving global prices down.
China’s investment level – out on a limb
- China is on path trodden by South Korea and Japan before it where rapid economic development is pursued through a high investment to GDP ratio.
- But China is an outlier compared to the history of those countries.
- And it’s an outlier when compared to other emerging markets, and has been so for some time.
Rebalancing at a snail’s pace, if at all
- Services as a share of GDP has risen sharply in recent years.
- But that is attributed to the build-up of financial services in tandem with the stock market rise.
- Economic rebalancing was in desperate need on the eve of the crisis. Instead, policy choices distorted the economy further.
- The distortion is many years in the making. Unwinding the distortion will likely take years.
More signs of a lack of rebalancing
- The volume of imports into emerging Asia (predominantly China) is contracting, a rare phenomenon.
- Falling labour share of GDP is a phenomenon seen across many countries (owners of capital taking an ever larger share of the fruits of growth). • But it was already low in China and has only just begun to turn.
Loans are supposedly not in great demand…
- Loan demand had supposedly dropped sharply in China, despite the fall in interest rates
- But although growth in the stock of credit growth has cooled it remains very strong.
Just when you think they’re getting on top of all that credit…
- China has had periods of cooler credit growth. The problem is they are not sustained. The debt addiction is proving hard to shake.
- December 2015 saw strong credit growth with bond financing picking up.
- The concern is that current borrowing is good money after bad, with a lot going to finance existing debts.
How can this debt build-up be pain free?
- $6.5bn per day – the rise in China’s non-financial private sector debt since the crisis.
- As we have previously stated, a similar pace of debt increase in other countries has led to a financial crisis.
- The burden of China’s debt build-up debt has led to a sharp rise in debt servicing costs.
- The rise in corporate sector debt in China and Hong Kong is staggering.
Forget equities, look at policy
- 2016 has been marked by falls in China’s currency and equities.
- The equity sell-off tells us little about China’s wider economy. But the policy response does.
- In recent months economic policy in China has been reactive, ad-hoc and seemingly uncoordinated between state institutions.
- And more fundamentally it shows there is a reluctance on the part of the authorities to let the market have the final say in the setting of prices in the economy.
The problems with pushing ahead with reforms
- Policy makers’ reluctance over market reform reflects two things
- Conflict within the Chinese Communist Party (CCP) about reform. Vested interest groups appear more entrenched than previously thought.
- Letting the market have the final say in the setting of prices too readily conflicts with the CCP’s aims of social stability and therefore the primacy of the Party.
- Authorities struggling with macroeconomic management and crisis mitigation more than previously thought.
- This gives us less confidence the CCP can do/ will do the right thing when it comes to reform and cleaning up the banking sector.
- China’s debt binge — which has yet to begin unwinding — remains too readily dismissed by the consensus.
- Our previous view of China experiencing a ‘bumpy’ landing is changing. A ‘hard-landing’ is now the most likely scenario.
- China’s slowdown is already impacting the global economy through the channels of growth, trade, inflation, interest rate expectations and financial linkages. There is more to come on all these fronts.
- We will elaborate more on this view and the impact it will have on the UK and global economies in a future release.
See full slides below.