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Page added on January 16, 2019

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Waking up from the Chinese dream

Consumption

There have been better starts to the New Year. The December Caixin Manufacturing PMI, a survey of Chinese manufacturing activity, contracted for the first time in 17 months. Soon after, reports began to emerge that China’s growth target will be lower than that set for 2018.

Apple, once the world’s most valuable company, sent shock waves across financial markets. It revised down its earnings for the end of 2018 citing an economic slowdown in China that was significantly greater than they had anticipated due to weak demand and the impact of trade tensions with the US.

While the dispute with the US has undoubtedly affected sentiment, with December data showing trade to the US weakening, over most of last year Chinese exports to the US were actually very strong. Exports to the US grew 11% in dollar terms in 2018 and it was government efforts to rein in the growth of credit that had a greater direct impact on the economy. As liquidity tightened last year sales of real estate and automobiles turned negative as companies and individuals found it harder to borrow money.

The chart below shows that as credit – represented by Total Social Financing – tightened last year  sales of real estate and automobiles turned negative as companies and individuals found it harder to borrow money.

Credit drives Chinese auto, housing sales

Out of the shadows

Since the financial crisis China has been increasingly reliant on debt to maintain economic growth. At the start of 2009 Chinese credit to the non-financial sector – debt owed by the government, households and companies – was slightly more than one and a half times the size of the economy. By the end of 2018 this had grown by 65% to more than two and a half times GDP. This is much faster than any other major economy. Even Japan, the world’s most leveraged major economy, only saw debt as a percentage of GDP grow by 14% over the same period.

It’s little wonder that the authorities were concerned. Such was the vulnerability of the economy to this rapid accumulation of debt, that starting mid 2016 the government has been engaging in a process of deleveraging the industrial sector and tightening credit across the economy.

Last year saw a particular focus on curtailing lending by China’s shadow banks, financial companies outside the conventional banking sector that engage in bank-like lending activity. Not all shadow bank activity is, well, shadowy. But there is little transparency around their activity or the potential risks that they might pose the financial system, and some shadow banking activity has been significantly curtailed by the most recent credit tightening cycle.

This has had little effect on the large state-owned enterprises that dominate the energy and commodity sectors. Their links to the state-owned banks mean they have little problem obtaining finance. The impact has been greater at smaller, private, companies down the value chain like metals fabricators, traders, and even independent refiners which are unable to easily obtain credit from the state owned banks. Already contending with tighter environmental inspections, a clampdown on tax evasion, as well as slowing demand, tighter credit conditions have caused a wave of bankruptcies across the private sector.

Real estate to the rescue

A move to shut down online peer-to-peer lending platforms, a small but fast growing part of the shadow credit sector, has also constrained consumer access to finance. With analysts estimating that peer-to-peer lenders financed as much as 15% of new vehicle sales in 2017, the contraction in the sector was a major contributor to the sharp fall in sales in the second half of last year.

Indeed 2018 was the first year in decades that new car sales were down on the previous year, impacting demand for flat steel and gasoline. With the government announcing that it will not provide relief to the auto sector by cutting purchase tax for passenger vehicles as it did in 2015, gasoline demand is expected to continue to be weak. Platts Analytics expect Chinese gasoline demand to grow at under 3% in 2019,  down from 6% in 2017.

Given this backdrop, it was somewhat surprising that the property market, that bellwether of the economy, was so resilient last year. It underpinned steel demand which grew at a robust 8% over the previous year in the first eleven months of 2018. With the clampdown on P2P lending platforms and a 30% fall in the Shanghai Composite index, money flowed into investment property last year, especially in smaller cities where there are fewer restrictions on purchasing investment properties. But with prices softening and home sales falling the outlook is less optimistic for 2019. This appears to have been priced into the steel market where the price of construction rebar has fallen by nearly 20% since the end of October.

Chinese steel prices weakened in late 2018

Did someone say stimulus?

As we move into 2019 the signs are that the government will continue down this ascetic path. It has approved $125 billion of new rail projects and will free up an estimated $117 billion for new lending by cutting the amount of cash banks are required to hold on reserve. But the effect of this on the economy and commodity demand may well be more muted than the headline numbers might suggest.

The government has announced a range of tax cuts to support the economy, especially small businesses. Some tinkering around the edges to support the property sector, like the lifting of some of the restrictions on secondary property purchases in larger cities, also seems likely. And policies to increase passenger cars and white goods are also imminent, according to comments by an official from the National Development and Reform Commission quoted by Chinese media last week.

In early January, some analysts were calling for stronger measures from Beijing to boost the economy. But the government is likely to tread carefully so as to channel any new lending to support smaller, private sector enterprises, not fuel a speculative property bubble as it did in 2012 and 2015.

The question is whether the government can stay the course on its debt reduction goals. An early resolution of the trade dispute with the US would certainly provide some relief to the economy and help mitigate some of the spillover from the tighter credit conditions.

The government has only just finished cleaning up the mess left over from the last decade of credit excess which left the country with industrial overcapacity and a glut of unwanted property. Another credit splurge would see debt compared to the size of the economy rise beyond even that of the Eurozone. Only Japan’s economy would be more leveraged, and China certainly doesn’t want to go down that path. Japan’s economy has gone virtually nowhere since the 1990s.

Platts



54 Comments on "Waking up from the Chinese dream"

  1. Cloggie on Sun, 20th Jan 2019 8:19 am 

    If you are so German, why so little empathy with them? What happened to famous German loyalty?

    Even DerHund, who is more leftist then you and is not a US-traitor, at least has the intellectual honesty to see more clearly what really happened to them.

    I am very loyal to my Dutch but have no problem admitting that the Dutch government was plain wrong in caving in to Churchill in 1940.

    Loyalty to your people is a good thing, almost as important to being loyal to the truth.

  2. Davy on Sun, 20th Jan 2019 8:52 am 

    “If you are so German, why so little empathy with them? What happened to famous German loyalty?”
    You mistake balance for extremism. That is your problem. Loyalty is more important than science and the truth for you. Packaged agendas that cherry pick facts and wrap them up in lies is your MO.

    “Even DerHund, who is more leftist then you and is not a US-traitor, at least has the intellectual honesty to see more clearly what really happened to them.”
    I am an independent, not liberal or conservative. I choose the best of both. I live with a liberal leaning wife and a conservative family. I give them both shit. BTW US-traitor is your Eurotard definition of an American who is honest about his country. I am here on an Anti-American site with rabid extremist anti-Americans like you. My position is if you are going to be anti-American be respectful about it and accurate. You are normally very inaccurate, unscientific, and very disrespectful.

    “I am very loyal to my Dutch but have no problem admitting that the Dutch government was plain wrong in caving in to Churchill in 1940.”
    Spare me the shit clogged

    “Loyalty to your people is a good thing, almost as important to being loyal to the truth.”
    LOL, nothing is higher than the truth. The truth trumps loyalty always.

  3. Cloggie on Sun, 20th Jan 2019 9:10 am 

    That’s a long, empty post, avoiding to answer the original question. As always. Open honest debate is not your thing. Not a single reference to Germany, supposedly your ancestor country.

    “The truth trumps loyalty always.”

    Not in your case.

    You are obsessed with the idea that America should control everything and everybody, even over the dead bodies of millions. And everybody who stands in the way should be destroyed, obviously under some moralistic pretext. There is not a fingernail between you and the mobster. At least the latter is open about his genocidal intent. Oh, and now his group is targeting your white demographic. They may have given op on the world (“NWO”), they haven’t given up on keeping white America under control.

    It is going to be a planetary orgasm to finally see both of you go under, while going at each others throat. I think we are going to let you thin each other out a little before we “go in” and pacify the joint and take it apart.

  4. Davy on Sun, 20th Jan 2019 9:28 am 

    “That’s a long, empty post, avoiding to answer the original question. As always. Open honest debate is not your thing. Not a single reference to Germany, supposedly your ancestor country.”
    I have great admiration for Germany. I lived and worked there for a year. I have dear friends there still. My blood is German. I am faithful to the truth and you are not. You are all about your emotional agenda of cherry picked facts wrapped up in lies. You could give a shit about the truth. For you it is all about appearance and position.

    “The truth trumps loyalty always.” Not in your case.”
    Always and you are on the record saying loyalty outweighs the truth. Gotcha

    “You are obsessed with the idea that America should control everything and everybody, even over the dead bodies of millions.”
    Blah blah blah, Since you are a rabid extremist then if I don’t practice rabid extremism then I am accused of supporting “America should control everything” BS you trumpet constantly. Give it a break. I am for a multi-polar world of good fences. You know this but you insist on painting me an American flag waiver. You and your ilk are the same like makattoo and juanpee.

    “And everybody who stands in the way should be destroyed, obviously under some moralistic pretext.”
    Rubbish and I will add you are the one seeking a new European Empire complete with a racist final solution and neo-colonialism (economic) of course.

    “There is not a fingernail between you and the mobster.”
    MOB, is a horrible example of a human being. I have nothing in common with the piece of shit.

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