RBS: China’s Economy: Slowing Distorted & Debt-Addicted In For Hard Landing

RBS: China’s Economy: Slowing Distorted & Debt-Addicted In For Hard Landing

RBS Economics’ Marcus Wright presentation on China’s economy is slowing. It’s policy makers are having to contend with a massive debt-fuelled.

China – the problems behind the headlines

China’s economy is:

  • Slowing – GDP growth has slowed more than the headline figures suggest, investment and production in particular
  • Distorted – overly reliant on investment with little sign of rebalancing
  • Debt-addicted – a post-crisis debt build-up that is proving hard to shake off
  • Coupled with ad-hoc and uncoordinated policy we believe China is more likely in a hard landing than a ‘bumpy landing’.

GDP growth – always on the money

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  • China’s GDP growth figure always comes in remarkably close to target
  • And it’s never revised
  • By the admission of the Prime Minister GDP data is “unreliable”
  • It’s difficult estimating China’s ‘true’ growth rate
  • But a figure of around 3-4% seems reasonable.

But investment has slowed sharply

China Economy

  • China’s post-crisis investment boom is unwinding.
  • Demand weakness at home and abroad, as well as existing excess capacity, has dented manufacturing investment growth.
  • The property market is starting to work through the inventory overhang. But property investment has stopped growing.

And so has industrial production

China Economy

  • All the years of excess investment has left a legacy of excess capacity.
  • And the slowdown in investment means China’s heavy industries are having a tough time of it.
  • Electricity, cement and steel production are all experiencing y/y declines.

The disinflationary winds blow


China Economy

  • And all that excess capacity is weighing down on prices.
  • Producer price deflation is running at close to four years.
  • And tellingly the GDP ‘deflator’(a wider gauge of prices in the economy) has turned negative.
  • Domestic price falls and a falling currency means significant disinflationary winds are blowing from China. Those ‘made in China’ goods are getting cheaper.

Exports and exporting excess capacity

China Economy

  • Chinese exports are struggling.
  • And the volume of Emerging Asia (predominantly China) exports have been declining since the spring of 2015.
  • But China’s steel exports have doubled in just two years.
  • It’s a symptom of the build-up of excess domestic capacity and is driving global prices down.

China’s investment level – out on a limb

China Economy

  • China is on path trodden by South Korea and Japan before it where rapid economic development is pursued through a high investment to GDP ratio.
  • But China is an outlier compared to the history of those countries.
  • And it’s an outlier when compared to other emerging markets, and has been so for some time.

Rebalancing at a snail’s pace, if at all

China Economy

  • Services as a share of GDP has risen sharply in recent years.
  • But that is attributed to the build-up of financial services in tandem with the stock market rise.
  • Economic rebalancing was in desperate need on the eve of the crisis. Instead, policy choices distorted the economy further.
  • The distortion is many years in the making. Unwinding the distortion will likely take years.

More signs of a lack of rebalancing

China Economy

  • The volume of imports into emerging Asia (predominantly China) is contracting, a rare phenomenon.
  • Falling labour share of GDP is a phenomenon seen across many countries (owners of capital taking an ever larger share of the fruits of growth).
  • But it was already low in China and has only just begun to turn.

Loans are supposedly not in great demand…

China Economy

  • Loan demand had supposedly dropped sharply in China, despite the fall in interest rates
  • But although growth in the stock of credit growth has cooled it remains very strong.

Just when you think they’re getting on top of all that credit…

China Economy

  • China has had periods of cooler credit growth. The problem is they are not sustained. The debt addiction is proving hard to shake.
  • December 2015 saw strong credit growth with bond financing picking up.
  • The concern is that current borrowing is good money after bad, with a lot going to finance existing debts.

How can this debt build-up be pain free?

China Economy

  • $6.5bn per day – the rise in China’s non-financial private sector debt since the crisis.
  • As we have previously stated, a similar pace of debt increase in other countries has led to a financial crisis.
  • The burden of China’s debt build-up debt has led to a sharp rise in debt servicing costs.
  • The rise in corporate sector debt in China and Hong Kong is staggering.

See full slides below.

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