China: Recent postive economic data may be papering over the cracks
China’s economy has been a bit of an enigma since the summer of 2015 when the country’s previously booming economy started to show signs of vulnerability. A combination of structural changes, subdued global demand and domestic challenges such as overcapacity in certain sectors and high corporate debt led growth to fall to a 25-year low for the full year 2015. It didn’t get much better from there, as economic activity continued to decelerate at the outset of the year. The Q1 economic expansion of 6.7% represented the weakest since the height of the global financial crisis in Q1 2009. The economy unexpectedly started to look better in Q2, as support from Chinese authorities prompted economic activity to stabilize. This trend continued into Q3, as encouraging economic data for August has shown that in addition to government spending, a booming housing market have supported growth. However, many of the same issues that plagued China’s economy in 2015 persist and there are concerns among analysts that decreasing private investment and a potential housing bubble could be detrimental in the longer term.
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Taking a closer look at some of August’s economic data we see that industrial production, which measures the output of the industrial sector, typically comprising of mining, manufacturing, utilities and, in some cases, construction, expanded 6.3% over the same month of last year. The reading exceeded the 6.0% rise observed in July and overshot the 6.2% increase market analysts had expected, representing the fastest expansion since March of this year.
The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. It is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. China's PMI jumped from 49.9% in July to 50.4% in August, which exceeded market expectations of a 49.8% increase and represented a 22-month high. China's PMI is now sitting in expansionary territory above the 50% threshold and reflected strong gains across the board. Employment hit a 17-month high and input prices—a reliable leading indicator for producer prices—increased markedly in August, suggesting that deflationary forces are gradually abating. Despite remaining in the red, new exports hit a three-month high.
Nominal retail sales grew 10.6% year-on-year, which was above the 10.2% increase recorded in July and expected by market analysts. August’s print was mainly the result of stronger sales for automobiles as well as for oil and oil-related products.
China’s downtrend in fixed-asset investment seems to have abated. In the first eight months of the year through to August, urban fixed-asset investment (FAI), excluding rural households, expanded 8.1% over the same period last year, which came in above the 7.9% rise the markets had expected. Property investment growth was up to 6% in August, which was up 5.4% during the same period from January to August of the previous year.
China’s housing market appears to be booming again, as housing sales were up 25.6% in the first eight months of the year compared to the same period a year ago while the latest data on house prices showed they expanded a record rate in August, jumping 9.2%, marking the fastest expansion in over 2 years.
So, what has some analysts concerned?
As has been the case for much of this year, there are fears that the recent encouraging economic data papers over the cracks of some of the real issues at the heart of China’s economy; many of those issues have persisted since last year when economic growth fell to a 25-year low. Investment and Industrial production appear to have stabilized, add in a booming housing market, and the Chinese economy looks pretty good. However, some analysts are concerned that the majority of that investment is from the public sector and that the booming housing market smells a bit like a housing bubble. Bubbles tend to burst.
The high property values are not only sparking fears among some of a housing bubble getting ready to burst, but that excessive inflows into the housing market due largely to the ever-increasing loans will fuel China’s already problematic debt level.
Chinese banks appear to be giving out loans like candy, extending CNY 949 billion (USD 142 billion) in new yuan loans in August, which was far more than July’s CNY 464 billion. August’s print also overshot the CNY 750 billion the markets had expected by quite a bit. In the 12 months up to August, new yuan loans totaled CNY 11.8 trillion (July: CNY 11.7 trillion). According to Business Insider, medium and long-term new loans to households in August, which are comprised of mostly mortgages, jumped 32.2% year-over-year.
A survey conducted by the People's Bank of China, published on 19 September, had some interesting results regarding house prices and prospective buyers. 53.7% of the respondents said that housing prices were "high and hard to accept" while 42.9% responded with "acceptable." 23.1% expected them to rise next quarter, and 11.9% expect them to fall. According to the survey, "the ratio of residents who were prepared to buy a house within the next three months increased 1.3% from the third quarter to reach 16.3%."
Wolf Richter, editor-in-chief of Wolf Street, couldn't have put it better when he said, "that’s a lot of people 'prepared to buy a house,' even with prices 'high and hard to accept.'"
He went on to say that, "there are several remarkable things in this survey: the worried tone in terms of the soaring prices, the increased desire to buy because, or despite, of the soaring prices, and the fact that this survey came via the official party organ from the PBOC which has been publicly fretting about the housing bubble, the debt bubble that comes along with it, and what it might do when it deflates."
Apart from the booming housing market, Investment in August, mentioned previously, stabilized at 8.1%. However, taking a closer look at the numbers reveals that there is a vast discrepancy between public and private sector investment suggesting that government spending is one of the only things keeping industry afloat along with the aforementioned cheap credit handouts. Public sector investment in the first eight months of the year grew 21.4% compared to the same period last year. Private sector investment, meanwhile, grew 2.1% over the same period.
Much of that public sector invesment appears to be going into Chinese industrial sector where a factory oversupply continues to be a problem as the government pours money into unprofitable factories of basic materials such as steel, aluminium, and diesel, to keep them afloat. Not only does it cast doubts over the quality of the industry growth in China, but the overproduction of these basic materials has driven down prices and crippled competitors across the world. This presents downside risks to not only China’s economic outlook, but the global economy as this continuing aid for factories has led to increased trade disputes and protectionist sentiment.
According to Ricard Torné, Head of Economic Research at FocusEconomics, “As states seek to defend their interests in a context of weak global growth, industrial overcapacity in certain sectors threatens to become a major trigger of global disputes. Moreover, some global leaders blame overcapacity mainly on China’s production practices. Some countries claim that the Chinese authorities are keeping certain industries afloat mainly through cheap credit and government support, which translate into lower production costs and, ultimately, slumping export prices.”
The economic figures do point to a stabilization of economic growth in the short term, however, longer-term issues persist. Our growth forecast for 2016 is unchanged this month at 6.6%, which falls within the PBOC’s growth target of 6.5%-7.0% growth for this year.
So, what now?
China’s economy bears watching as increased credit loans and especially government spending cast doubts over the quality of their growth. According to Eswar Prasad, a Cornell University professor and former China head for the International Monetary Fund, “the latest slew of economic data points to a stabilization of growth but also heightens concerns about a continued investment binge.”
Chinese authorities appear to be walking a tightrope. On the one hand they are publically fretting over growing debt and increasing house prices, on the other hand, as industry is a big part of China’s economy, they won’t want to cut investment for fear that a sharp downturn in economic activity could ensue. All that can be done is to sit back and watch.
Date: September 22, 2016
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