China faces a lost decade, fears Fitch Ratings, giving a high-end estimate of non-performing loans (NPLs) of 15 to 21 percent of, or 10 times the official ratio.
In the first place, this is clearly an upper ceiling: given the slowdown in velocity of money over the past two-plus years, it's only natural that more loans than before are taking longer to get repaid. Many firms are simply taking far longer than before to get compensated for their products and services, so it's natural that they're also taking far longer to meet their liabilities; but in most cases they eventually will.
In this light, it's encouraging that money supply (M2) growth picked up in August after worrying signs of decline in preceding months which some portended to be a looming "liquidity trap"; as money growth continues to rebound, the NPL ratio will naturally start to look healthier.
Beyond this, it's worth noting that even the aggregate debt-to-GDP ratio and credit efficiency metric used by Fitch are actually better than they appeared earlier this year. At 253 percent of GDP, this year's debt-to-GDP is already well below the most alarming estimate of about 350 percent for last year. And the credit efficiency ratio of 0.3 is far above the 0.2 or even less that was cited back in spring, when the Q1 stimulus was only starting to take effect.
Over and above all this, there are tentative yet clear indications that supply-side reforms are starting to pick up, and that this has already begun to ease the pressure for more stimulus, especially monetary but even fiscal as well.
A lost decade isn't quite in the offing, and the pessimists' own revised figures are unwittingly weakening their own case.
Friday, September 23, 2016
Wednesday, September 21, 2016
It's official: China has bottomed out
China's economy has fundamentally stabilized with robust growth and its currency is no longer unduly burdened by depreciation pressure, says Li Keqiang, who later adds that the 2016 target of 6.5 to 7 percent GDP expansion will be met.
As well, the central bank reports that the vaunted "L-shaped" recovery has been achieved:
This comes as more doom-and-gloom is being touted by Western financial outlets concerning Chinese debt levels: this time, it's the so-called "credit-to-GDP gap", measured at an eye-popping 30.1 percent (where anything over 10 percent is a red flag).
Taken in isolation, however, this figure easily exaggerates the gravity of the situation. It would be far more alarming in the absence of evidence that Beijing is succeeding in engineering a soft landing; as more such evidence comes in, initial proof of deleveraging can be expected to start trickling in, as well.
Now that warnings of Chinese financial meltdown have been pervasive for over a year, both experts and the general public in China can more confidently push back against the pessimism with an appreciation of the nuance of their socioeconomic system which makes direct comparison with the West implausible. The high debt figures and debt-to-GDP metrics in themselves mean a lot less than they would in a Western system; the overriding concern in China has never been a broadly cascading seizure of credit but rather a deteriorating ratio of credit growth to GDP growth, which now appears increasingly unlikely.
It has been said on multiple occasions in 2016 that it now takes four yuan of new credit to generate just one yuan of additional GDP, but this ratio appears to have been temporarily inflated by the massive first-quarter stimulus, which blew year-on-year credit growth out of the water. As such, it has since inevitably declined, though still uncomfortably high; there's little reason to doubt, however, that the decline will continue.
Back on February 22, in a draft post for this blog, I had noted:
As well, the central bank reports that the vaunted "L-shaped" recovery has been achieved:
Li’s expression of confidence in the nation’s economic outlook follow similar signals from the central bank this week. Better-than-expected lending and money supply data for August show the economy has bottomed in its “L-shaped” recovery, a central bank newspaper said in a front-page commentary on Monday.Though we'll need at least another month or two of data to genuinely confirm that Chinese growth has bottomed, the confidence of these statements is still notable: Chinese officials at this paramount level are not given to exaggeration or hyperbole.
This comes as more doom-and-gloom is being touted by Western financial outlets concerning Chinese debt levels: this time, it's the so-called "credit-to-GDP gap", measured at an eye-popping 30.1 percent (where anything over 10 percent is a red flag).
Taken in isolation, however, this figure easily exaggerates the gravity of the situation. It would be far more alarming in the absence of evidence that Beijing is succeeding in engineering a soft landing; as more such evidence comes in, initial proof of deleveraging can be expected to start trickling in, as well.
Now that warnings of Chinese financial meltdown have been pervasive for over a year, both experts and the general public in China can more confidently push back against the pessimism with an appreciation of the nuance of their socioeconomic system which makes direct comparison with the West implausible. The high debt figures and debt-to-GDP metrics in themselves mean a lot less than they would in a Western system; the overriding concern in China has never been a broadly cascading seizure of credit but rather a deteriorating ratio of credit growth to GDP growth, which now appears increasingly unlikely.
It has been said on multiple occasions in 2016 that it now takes four yuan of new credit to generate just one yuan of additional GDP, but this ratio appears to have been temporarily inflated by the massive first-quarter stimulus, which blew year-on-year credit growth out of the water. As such, it has since inevitably declined, though still uncomfortably high; there's little reason to doubt, however, that the decline will continue.
Back on February 22, in a draft post for this blog, I had noted:
China is now embarking on a systematic redistribution of wealth from the state to the household sector. To pose it in Xi Jinping's anti-corruption terms, it means a massive expropriation of "gray income" from the corrupt bureaucracy and its cronies to the exploited masses of workers and peasants, to allow this still subsistence-poor majority of the population to join the ranks of the urban middle class.Some seven months later, these clear imperatives that Beijing had early this year in the face of unprecedented uncertainty over its ability to pull off a difficult economic transition are beginning to be addressed. It's early innings of a long ballgame, but at least the players have all shown up, healthy and in high spirits to notch the win: it was the prospect that the battle was over even before it began which so deeply upset the world last winter.
The big wild card over the remainder of the year is likely to be the yuan's exchange rate. Judging from this now often-quoted interview with PBOC governor Zhou Xiaochuan, China recognizes the importance of stabilizing it.
Tuesday, September 13, 2016
Strong August vindicates Beijing's heavy-handed intervention - for now
With key economic metrics stabilizing or even perking up in August, Beijing's heavy-handed stabilization efforts are being vindicated in the early running - adding fuel to the fire for those who despise China's constant cheating of the rules of "free markets", but ironically also likely to earn rare but growing praise from smarting competitors.
All three key data series - industrial production, retail sales, and fixed-asset investment (FAI) - beat expectations. The first two have continued their firming up since early 2015, whilst FAI has continued to fall, but this is not at all unexpected, given the sheer base level:
In a sign of near-term China bullishness, Goldman Sachs is moving to short-term overweight on Chinese stocks. Along this same vein, emerging markets in general are becoming more attractive compared to developed ones, given that the populist backlash in the latter is gathering steam as the US election nears, itself sandwiched between Brexit last June and next spring's important legislative races in France and Germany which are already widely expected to sweep right-wing nationalists to unprecedented power.
Of course, there are still basket cases like Venezuela or Zimbabwe which must be avoided like the plague by emerging market investors, but the overall picture has improved markedly since late 2015, and the short-term pickup in Chinese demand for commodities is the central part of this story.
The medium to long-term outlook for China itself remains cloudy. Doom and gloom could return as investment and industry continue to grind down to neutral; per Goldman's analysis, though, this has likely been delayed to start of 2017, giving the central bank and State Council a welcome breather from further stimulus.
A more recent inset of the above chart, dating back to January 2014, shows that FAI and industrial production fell precipitously in 2014 - the year that the white-hot real-estate market began to cool:
In 2015, both were then stabilized with strong policy support, primarily in the form of benchmark interest rate and reserve requirement ratio (RRR) cuts until the late-June stock market crash, and then with stepped-up fiscal and monetary stimulus overall in the second half in response to the unleashed financial volatility. This helped keep retail sales from falling below double digits throughout 2015, buoying what has since become an ever bigger slice of the overall growth pie (70+ percent in H1 2016); indeed, the slight pickup in industrial production since mid-2015 can only have coincided with the noticeable decline in FAI since late 2015 only because more installed plant capacity has shifted to end-user consumer goods, i.e. retail products; the strong growth in car sales since late 2015 is the poster child for this trend, for the obvious cross-industry impact of the auto sector.
Worth particularly special mention is the sheer scale of the central bank's ongoing stimulus - its "backdoor QE", so to speak. Primarily in the form of special short to medium-term lending facilities to the large state-owned commercial banks, but also in the form of bond sales to these surrogate entities, these when combined with the rapid growth of the municipal bond market to refinance local government administrations have given Beijing far and away the world's biggest monetary easing program over the last 12 to 15 months, propelling its total debt load into outer space. In this light, the yuan's plunge of nearly 8 percent since PBOC's unexpected August 2015 devaluation indeed seems artificially suppressed - the actual pressure on a larger devaluation, though not nearly as great as the most extreme bears (read: Kyle Bass) think, has obviously been much more than Beijing has let on.
With the latest stats, it increasingly appears that these China doom-and-gloomers have essentially missed the boat: by the time they piled on their big bets of a Chinese meltdown last January and February, the worst was already over, and with Beijing's heavy-handed measures to stabilize the real economy, the "L-shaped recovery" which Xi Jinping's administration has enshrined as the country's salvation has been tentatively accomplished.
The question now is whether it will be sustained. The key in this regard will be the latest debt figures, to be released starting tomorrow: these will offer clues as to whether the recent credit binge is in fact moderating, after some cooling of lending activity in July. So a future post here will break down the key credit and financing metrics for August, comparing the change in these to that in real economic activity to give a sense of whether Chinese growth is becoming more sustainable (i.e. not significantly worsening the total debt-to-GDP ratio).
All three key data series - industrial production, retail sales, and fixed-asset investment (FAI) - beat expectations. The first two have continued their firming up since early 2015, whilst FAI has continued to fall, but this is not at all unexpected, given the sheer base level:
In a sign of near-term China bullishness, Goldman Sachs is moving to short-term overweight on Chinese stocks. Along this same vein, emerging markets in general are becoming more attractive compared to developed ones, given that the populist backlash in the latter is gathering steam as the US election nears, itself sandwiched between Brexit last June and next spring's important legislative races in France and Germany which are already widely expected to sweep right-wing nationalists to unprecedented power.
Of course, there are still basket cases like Venezuela or Zimbabwe which must be avoided like the plague by emerging market investors, but the overall picture has improved markedly since late 2015, and the short-term pickup in Chinese demand for commodities is the central part of this story.
The medium to long-term outlook for China itself remains cloudy. Doom and gloom could return as investment and industry continue to grind down to neutral; per Goldman's analysis, though, this has likely been delayed to start of 2017, giving the central bank and State Council a welcome breather from further stimulus.
A more recent inset of the above chart, dating back to January 2014, shows that FAI and industrial production fell precipitously in 2014 - the year that the white-hot real-estate market began to cool:
In 2015, both were then stabilized with strong policy support, primarily in the form of benchmark interest rate and reserve requirement ratio (RRR) cuts until the late-June stock market crash, and then with stepped-up fiscal and monetary stimulus overall in the second half in response to the unleashed financial volatility. This helped keep retail sales from falling below double digits throughout 2015, buoying what has since become an ever bigger slice of the overall growth pie (70+ percent in H1 2016); indeed, the slight pickup in industrial production since mid-2015 can only have coincided with the noticeable decline in FAI since late 2015 only because more installed plant capacity has shifted to end-user consumer goods, i.e. retail products; the strong growth in car sales since late 2015 is the poster child for this trend, for the obvious cross-industry impact of the auto sector.
Worth particularly special mention is the sheer scale of the central bank's ongoing stimulus - its "backdoor QE", so to speak. Primarily in the form of special short to medium-term lending facilities to the large state-owned commercial banks, but also in the form of bond sales to these surrogate entities, these when combined with the rapid growth of the municipal bond market to refinance local government administrations have given Beijing far and away the world's biggest monetary easing program over the last 12 to 15 months, propelling its total debt load into outer space. In this light, the yuan's plunge of nearly 8 percent since PBOC's unexpected August 2015 devaluation indeed seems artificially suppressed - the actual pressure on a larger devaluation, though not nearly as great as the most extreme bears (read: Kyle Bass) think, has obviously been much more than Beijing has let on.
With the latest stats, it increasingly appears that these China doom-and-gloomers have essentially missed the boat: by the time they piled on their big bets of a Chinese meltdown last January and February, the worst was already over, and with Beijing's heavy-handed measures to stabilize the real economy, the "L-shaped recovery" which Xi Jinping's administration has enshrined as the country's salvation has been tentatively accomplished.
The question now is whether it will be sustained. The key in this regard will be the latest debt figures, to be released starting tomorrow: these will offer clues as to whether the recent credit binge is in fact moderating, after some cooling of lending activity in July. So a future post here will break down the key credit and financing metrics for August, comparing the change in these to that in real economic activity to give a sense of whether Chinese growth is becoming more sustainable (i.e. not significantly worsening the total debt-to-GDP ratio).
Friday, September 9, 2016
Key metric continues to blow "slowdown" out of the water
Economic slowdown? Risk of hard landing? Car sales rose 24.5 percent in August to cap off a 13-percent increase YTD. Gordon Chang, Jim Chanos, Kyle Bass and the like must be shaking their heads in disgust. China should long have completely melted down by now, long bread lines should long ago have formed in its cities, and the communist regime should be on its last legs.
So successful has the tax cut on small passenger vehicles last October been that a strong case is now being made to make them permanent...what squeezes margins at Chinese and foreign automakers alike will continue to provide a boon to Chinese consumers, on whose shoulders the economy's transition increasingly rests.
Along with rapidly growing residential mortgages, the boom in auto financing is likewise a pillar of the government policy to grow the household slice of the total debt pie and whittle back the corporate slice with the concomitant boost to consumer demand and thereby corporate profitability.
The strong growth of the auto sector alone lends credence to the overall increase in industrial profitability in China in 2016 - after real estate and infrastructure, transport is the main pillar of demand across the entire breadth of capacity-brimming industrial segments nationwide.
With August factory-gate deflation down to just 0.8 percent (from 1.7 percent in July), even as August consumer price inflation has moderated to 1.3 percent, signs are unmistakable that the economy is approaching a healthy pricing equilibrium that strikes the right balance between corporate profitability and consumer affordability, which will be essential to capping and reducing the country's debt-to-GDP ratio.
The PPI figure is particularly startling: it stood at -5.9 percent, i.e. nearly 6 percent deflation, at year-end 2015: in just eight months, it's more than five-sixths of the way back to neutral, belying all the repeated claims that Beijing's policies are still backsliding and the country's economic prospects are still deteriorating.
If anything, before long things might be stable enough at a level satisfactory enough that a real danger of complacency could return to threaten the communist authorities: that would be quite the irony, given what China's gone through in just the last 15 months.
Thankfully, things remain dire in much of the economy and much of the country. As it is, many foot-dragging party officials apparently still need a good kick in the butt in terms of implementing reforms to boost private investment, the stall-out of which remains the biggest threat to recovery.
But the vehicle sales, especially if double-digit or high single-digit expansions persist with extended incentives for consumers, are already a resounding refutation to everyone who's staked either reputation or hard-earned money (or both) on a Chinese crash. It even has another silver lining: the ferocity of competition between Chinese and foreign carmakers alike is likely to put sustained pressure on retail prices, as the big players in an increasingly cutthroat market are forced to compensate for squeezed dealer margins (as little as $10 per premium car now, per above Bloomberg piece) with more sheer volume. That won't just be great news for Chinese consumers: it's a shot in the arm for everyone.
So successful has the tax cut on small passenger vehicles last October been that a strong case is now being made to make them permanent...what squeezes margins at Chinese and foreign automakers alike will continue to provide a boon to Chinese consumers, on whose shoulders the economy's transition increasingly rests.
Along with rapidly growing residential mortgages, the boom in auto financing is likewise a pillar of the government policy to grow the household slice of the total debt pie and whittle back the corporate slice with the concomitant boost to consumer demand and thereby corporate profitability.
The strong growth of the auto sector alone lends credence to the overall increase in industrial profitability in China in 2016 - after real estate and infrastructure, transport is the main pillar of demand across the entire breadth of capacity-brimming industrial segments nationwide.
With August factory-gate deflation down to just 0.8 percent (from 1.7 percent in July), even as August consumer price inflation has moderated to 1.3 percent, signs are unmistakable that the economy is approaching a healthy pricing equilibrium that strikes the right balance between corporate profitability and consumer affordability, which will be essential to capping and reducing the country's debt-to-GDP ratio.
The PPI figure is particularly startling: it stood at -5.9 percent, i.e. nearly 6 percent deflation, at year-end 2015: in just eight months, it's more than five-sixths of the way back to neutral, belying all the repeated claims that Beijing's policies are still backsliding and the country's economic prospects are still deteriorating.
If anything, before long things might be stable enough at a level satisfactory enough that a real danger of complacency could return to threaten the communist authorities: that would be quite the irony, given what China's gone through in just the last 15 months.
Thankfully, things remain dire in much of the economy and much of the country. As it is, many foot-dragging party officials apparently still need a good kick in the butt in terms of implementing reforms to boost private investment, the stall-out of which remains the biggest threat to recovery.
But the vehicle sales, especially if double-digit or high single-digit expansions persist with extended incentives for consumers, are already a resounding refutation to everyone who's staked either reputation or hard-earned money (or both) on a Chinese crash. It even has another silver lining: the ferocity of competition between Chinese and foreign carmakers alike is likely to put sustained pressure on retail prices, as the big players in an increasingly cutthroat market are forced to compensate for squeezed dealer margins (as little as $10 per premium car now, per above Bloomberg piece) with more sheer volume. That won't just be great news for Chinese consumers: it's a shot in the arm for everyone.
Thursday, September 1, 2016
Explaining discrepancy between H1 listed profits and total profits
Listed Chinese companies' profits fell 5.5 percent in H1 2016, according to the China Securities Journal, a better-than-expected performance in light of the rocky and depressing start to the year. This also compares favorably with the S&P 500, which is on pace for a nearly 9 percent year-on-year decline for the same period (nearly 90 percent of companies having reported Q2 earnings).
However, this contrasts sharply with the National Bureau of Statistics' (NBS) reported 6.9 percent increase in total industrial profits year-on-year for January-July 2016 - including 6.2 percent increase for H1 2016 (January-June). How to account for the nearly 12-percentage point gap between the two metrics, both by official agencies? Probably a combination of the following factors.
1. The NBS figure is a more generous figure of profits before interest and/or taxes.
2. The NBS figure allows for more aggressive revenue recognition, given that listed companies' income statements must be complemented by cash flow statements which make it harder to fudge marginal sales.
3. The listed companies' figures are generally more conservative and less prone to artificial inflation, given that these firms are under more scrutiny, including in many cases by international investors and analysts.
4. The less than 3,000 listed companies are still a small slice of the economy and don't include many highly profitable medium-size private firms; if anything, the role of the stock market in Chinese business finance has stagnated since last year's crash, with only selective high-tech IPOs somewhat picking up since Q1; since smaller and medium-size tech firms (or those claiming to be high-tech) are a significant portion of privately owned companies that have listed since 2013-14, and many of these are still loss-making and dependent on future prospects, that's been a drag on listed firms' profit growth over the past year.
Like other apparent inconsistencies between sets of Chinese economic data, these earnings spreads between listed and all firms is troubling but shouldn't be dismissed out of hand as evidence of statistical fabrication; over time they will necessarily reconcile.
However, this contrasts sharply with the National Bureau of Statistics' (NBS) reported 6.9 percent increase in total industrial profits year-on-year for January-July 2016 - including 6.2 percent increase for H1 2016 (January-June). How to account for the nearly 12-percentage point gap between the two metrics, both by official agencies? Probably a combination of the following factors.
1. The NBS figure is a more generous figure of profits before interest and/or taxes.
2. The NBS figure allows for more aggressive revenue recognition, given that listed companies' income statements must be complemented by cash flow statements which make it harder to fudge marginal sales.
3. The listed companies' figures are generally more conservative and less prone to artificial inflation, given that these firms are under more scrutiny, including in many cases by international investors and analysts.
4. The less than 3,000 listed companies are still a small slice of the economy and don't include many highly profitable medium-size private firms; if anything, the role of the stock market in Chinese business finance has stagnated since last year's crash, with only selective high-tech IPOs somewhat picking up since Q1; since smaller and medium-size tech firms (or those claiming to be high-tech) are a significant portion of privately owned companies that have listed since 2013-14, and many of these are still loss-making and dependent on future prospects, that's been a drag on listed firms' profit growth over the past year.
Like other apparent inconsistencies between sets of Chinese economic data, these earnings spreads between listed and all firms is troubling but shouldn't be dismissed out of hand as evidence of statistical fabrication; over time they will necessarily reconcile.
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