10 signs of economic trouble that China’s official data won’t tell6 July, 2012, 12:33. Posted by Zarathustra
The People’s Bank of China (PBOC) has cut interest rates once more in hope to stimulate the economy. The pace of monetary easing has surprised a lot of people, and we were expecting a cut in reserve requirement ratio instead of an interest rate cut. But for the purpose of the current discussion, the form of easing is not the focus here.
Whenever the PBOC eases monetary policy ahead of macro data releases, the market will instinctively believe that the coming macro data releases are going to look ugly, and the latest move triggered more or less the same reaction. Bank of America Merrill Lynch, for instance, advise everyone to “Slightly lower your expectation on June/2Q data”.
Of course, when PBOC cut interest rate last month, the macro data did not turn out as bad as most feared (far from great, of course, and they could have been massaged anyway), so whether the latest move necessarily signals loads of bad (official) data is debatable. The data we have already had so far (with PMIs only, really) suggested that June was probably worse than May, although the pace of worsening has probably moderated a bit. Both the official and HSBC/Markit manufacturing PMI fell, although the official figure remained above 50. Meanwhile, the official service PMI rose and HSBC/Markit PMI fell. Beyond that, we have only got an unconfirmed report of new loans number from big 4 banks, which suggests that new loans number for the full month could disappoint the market.
Thus in terms of data, we do not have too many indications except that June is not going to look too great. Outside macro data, however, we have no shortage of bad news which suggests slowdown and troubles everywhere. It has become rather difficult to keep track of every story as the slowdown turns ugly, but these are 10 of the many that we have put into writing that you need to know:
|Source: Charlie Fong via Wikicommons|
Makers of heavy equipment are facing increasing difficult in collecting receivables. These companies provide vendor financing for buyers at increasingly generous terms, but it turns out that increasing number of buyers simply will not be able to repay the liabilities as the economy slows. There were even rumours that it that one of these companies was to lay-off 30% of its work force.
As real estate investment and fixed asset investment growth slows, demand for steel fell. As a result, steel prices collapsed and making steel is no longer profitable.
Although steelmakers are still making steel, steel traders further downstream are going out of business.
Similarly, as manufacturing slows, demand for electricity falls. As a result, coal inventory increases to a point that warehouses in various ports are so full of coal.
As selling coal and steel are no longer profitable in China. These businessmen found new businesses to diversify into: selling pigs.
Textile inventory is facing weakening demand as the economy slows, both externally and internally. While the external prices for cotton fell dramatically, the domestic prices remain relatively high as speculators attempt to take advantage of the spread between the import prices and domestic prices using borrowed money. This led to huge build-up of inventory at ports, and the situation is clearly unsustainable because hoarders will have to sell the inventory sooner or later to obtain cash.
The growth of Macau casino revenue turns out of be quite closely linked to Chinese GDP growth. This is understandable because you can’t really have massive money for betting unless you have enormous amount of money, and for rich blokes in China, they are rich only if the economy is booming, inflation is sky high, real estate market is hot, etc. None of these
8. The arcane corners of (shadow) banking: The ticking time bomb of China’s trusts industry
Trusts industry exploded as the government tightened policy last year and bank loans became harder to come by. However, many of these trusts are financed by banks anyway, and the money are largely used to fund real estate developers, coal miners and others. Again, as the economy slows, these companies are having difficulties to service the debts. In one case we documented, the company which borrowed from trust turned out to be involved in informal lending itself, and the boss was arrested over illegal activities.
9. The arcane corners of (shadow) banking: Credit crisis in Zhejiang which pulls 600 companies into it
One company in Zhejiang of China gone bust. It wasn’t a big deal, until it is. It turns out that a lot of small and medium sized companies rely on “credit guarantors” to obtain bank credits. While normally you would think that such guarantors are some independent third party performing such service, it turns out that these companies in Zhejiang simply guarantee each other. So when one company went bust, banks pulled loans from every company that are guaranteed by the company that has gone. As the chain of guarantees continue to be exposed, it turns out that more than 600 companies are in it, and banks are trying to pull loans from all of these companies.
Without any doubt, this is the sign that the Chinese economy is slowing fast. There are a few dimensions in looking at this issue. First of all, the government would like it to be weakened if the economy slowed. Secondly, trade surplus is trending lower. Thirdly, the nature of capital flow for emerging market is often pro-cycling, meaning that money flows into the country when the economic growth is strong, and reverses when growth stalls. As a result, you now have more selling pressure of Chinese Yuan. Fourth, Chinese companies are short US dollar, thus they have to dump Chinese Yuan when US dollar strength.
The only good news that we could think of (which is not good news for the long term) is that the real estate market is warming up as the government is obviously trying to reflate the economy once more, which may or may not fail.