CICC: Corporate sector deleveraging is happening in China28 May, 2012, 15:55. Posted by Zarathustra
Earlier, CICC thinks that China could crash if Greece exits the Eurozone. But of course, as we have here been highlighting for really quite a while that China is facing its own set of huge problems that will be hugely negative for growth even without the Euro crisis.
We have already speculated that debt deflation is happening, as manifested by extremely low demand for credit by historical standard, people rushing to repay debts, and possibly shrinking banking deposits. On the first point, we have also got official confirmation that Chinese banks are likely to miss loans target this year as credit demand slows. Debt deflation, in other words (and somewhat milder term), deleveraging, is becoming a reality in China.
CICC just came back with yet another quick note, supporting the arguments we have for a while, that deleveraging in the Chinese corporate sector is happening. And as anyone should have expected, private sector deleveraging is negative for GDP, and the only way to offset that, of course, is for the government to step in. That is if you believe that the Chinese government is God:
The current economic slowdown reflects a lower potential growth rate and is reasonable to some extent. However, private sector deleveraging may have a significant negative impact on aggregate demand, exposing the economy to notable downside risks. Though the leverage of China’s household sector is not high, the leverage of the corporate sector is at a historical peak, having risen rapidly in the last few years. The corporate sector is under increasing pressure to deleverage.
The deleveraging of the private sector will see scaling back by industries that have experienced over-expansion, positive to structural adjustment. But since deleveraging is pro-cyclical and self-reinforcing due to the financial accelerator, the government needs to strike a fine balance between maintaining economic growth and adjusting economic structure. Among the recently stepped-up efforts to fine-tune policies preemptively, monetary easing should mitigate the pain of corporate deleveraging, and more government investment will likely help make up for less private sector investment due to deleveraging.
May economic data preview: We expect inflation to moderate further, industrial production growth to pick up slightly; investment growth to continue slowing in the context of de-bubbling in the property market; retail sales growth to climb slightly thanks to base effect; export and import growth to rebound on holiday effect but remain weak; and new lending to recover on accelerated government investment, limiting the decline of the M2 growth rate.