“Following the release of Chinese economic and money/credit data last week, there has been much confusion in the investment industry over whether or not Chinese economic growth is finally picking up. Having carefully examined all the data, we do not find evidence of a meaningful pick-up in growth.” – BCA Analytics
Another day, another warning about the state of China’s economy.
This time, the warning comes from analysts at BCA Analytics who are extremely concerned about China’s deteriorating capital spending. Specifically, BCA’s research shows that the growth rate in private fixed asset investment, excluding infrastructure, dropped to an all-time low during the first half of 2016.
Fixed asset investment growth in the manufacturing sector has fallen to 0% (year-on-year) and is about to turn negative if you take the monthly readings. The six-month moving average for the same metric has dropped to a ten-year low. Also, the six-month average of fixed asset investment in the mining sector plunged to a low of -20% in the past few months (one of the lowest levels recorded), and investment in the service sector has been bouncing around a 10-year low for much of this year.
To an extent, China has been manipulating its investment figures via the government’s fiscal/credit stimulus program. Under this program, authorities issued RMB 1.2 trillion of bonds between September 2015 and March 2016 to fund infrastructure projects, keeping infrastructure investment at very high levels. But this debt-funded building boom has only been able to take the edge off the deteriorating figures. China’s aggregate fixed asset investment growth rate has fallen to 8% this year, the lowest since 2001.
Along with the weak investment figures, BCA notes that neither industrial production nor electricity output has registered a meaningful increase in recent months. They have stopped declining but are not improving.
China’s economy is currently going through a transition as policymakers trying to steer the country away from cyclical, capital intensive industries and rebalance towards a service economy.
The country is having some success in this respect.
China’s economy is going through a transition
As Bloomberg reports, consumption contributed 73.4% to China’s economic growth in the first half of 2016, up from about 60% a year earlier. Further, retail sales the period increased by 10.6% compared to the median estimate of 9.9%.
However, first-quarter figures also showed that while consumption is becoming a more important part of the economy, China’s growth is still heavily reliant on credit growth. Aggregate financing totalled 1.6 trillion yuan for the month of June, compared with an estimate of 1.1 trillion yuan in a Bloomberg survey. For June, China’s M1, which includes bank deposits and currency in circulation, rose 24.6% year-on-year the biggest increase in six years while M1, which includes savings deposits increased 11.8%. M2 is now almost twice the size of China’s gross domestic product.
With investment falling and debt levels rising, China isn’t moving in the right direction. What’s more, policymakers’ decision to let the yuan fall as low as 6.8 per dollar in 2016 to support struggling exporters is only adding to the uncertainty surrounding the country’s economic outlook.
A more curious trend is that China outward direct investment is now running at higher levels than inward foreign direct investment. During May outward direct investment hit $146 billion while FDI fell to an annualised $127 billion. CLSA believes that this trend shows that Chinese authorities are more willing to let capital flow out of the country in a controlled manner, which signifies a heightened belief by policymakers that they have the capital account outflows under control.
Only time will tell whether or not this is the case but it’s clear that China’s economy is undergoing some substantial changes.