Going forward, the key thing to look for is some sign that the latest bout of stimulus which has buoyed the SOE sector since 1Q doesn't worsen the long-term industrial overcapacity and debt overhang which has pushed the debt-to-GDP ratio to as much as 350 percent. As the negative PPI moderates further (it's fallen from -5.9 percent to -2.3 percent YTD), we should eventually see a moderation of credit growth relative to GDP growth which is so badly needed for a sustainable economic rebalancing, but which still isn't anywhere in sight thanks to the massive 2016 stimulus that's apparently succeeded in averting a hard landing.
For the moment, Beijing's still firmly in control. Industrial profits are showing additional tentative signs of recovery, and perhaps real meaningful capacity cuts are finally on the way at the big SOEs. These are all acknowledged even under a headline such as "China's Economy: Complex and Grim?"
That's bad news for China bashers and global economic doomsayers more broadly, but hardly resounding reassurance for optimists: given how much SOE reforms and restructuring have been delayed for years, the world is rightly skeptical that anything's actually changed on the ground until evidence of it is seen across the board - not just in PPI and corporate profits, but credit and NPL figures as well. If the various data series don't eventually confirm each other, not only does it cast doubt on claims of recovery, but it renews long-running mistrust of official Chinese statistics.
The most credible estimates of China's total NPL pile, including one mentioned in this 2Q GDP commentary by Macquarie Research, are between $1 and $2 trillion, or up to 10-15 percent of the entire corporate debt load. Even with an optimistic recovery and securitization rate of 50 to 75 percent, that leaves up to a full trillion dollars of losses to recapitalize the banking system of - dwarfing the 300 billion euros now being floated for a European banking bailout (150 billion euros suggested for Italy alone). That's an eye-popping figure, for sure, but by no means enough to make a banking crisis a foregone conclusion. Extreme China bears not only tend to overstate the sheer size of the NPL problem but seem to largely dismiss any significant recoup.
The entire global economy has become a game of confidence: confidence and faith that policymakers, if they haven't already gotten their act together, will do so before long. If in the remainder of 2016 Beijing actually does so, it will have a positive global impact commensurate with China's size and heft.
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