RBS: China’s Economy: Slowing Distorted And Debt-Addicted

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China’s Economy: Slowing Distorted And Debt-Addicted by RBS Economics, SlideShare

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

  • 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's 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's 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 -5

China's 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's 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's 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's 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's 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's 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's 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's 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.

Forget equities, look at policy

  • 2016 has been marked by falls in China’s currency and equities.
  • The equity sell-off tells us little about China’s wider economy. But the policy response does.
  • In recent months economic policy in China has been reactive, ad-hoc and seemingly uncoordinated between state institutions.
  • And more fundamentally it shows there is a reluctance on the part of the authorities to let the market have the final say in the setting of prices in the economy.

The problems with pushing ahead with reforms

  • Policy makers’ reluctance over market reform reflects two things


  1. Conflict within the Chinese Communist Party (CCP) about reform. Vested interest groups appear more entrenched than previously thought.
  2. Letting the market have the final say in the setting of prices too readily conflicts with the CCP’s aims of social stability and therefore the primacy of the Party.


  • Authorities struggling with macroeconomic management and crisis mitigation more than previously thought.
  • This gives us less confidence the CCP can do/ will do the right thing when it comes to reform and cleaning up the banking sector.

…and finally

  • China’s debt binge — which has yet to begin unwinding — remains too readily dismissed by the consensus.
  • Our previous view of China experiencing a ‘bumpy’ landing is changing. A ‘hard-landing’ is now the most likely scenario.
  • China’s slowdown is already impacting the global economy through the channels of growth, trade, inflation, interest rate expectations and financial linkages. There is more to come on all these fronts.
  • We will elaborate more on this view and the impact it will have on the UK and global economies in a future release.

See full slides below.

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