China elec Jul15Latest data for China’s economy continue to suggest a major slowdown is underway:

  • Rail freight, one of Premier Li’s key data points, was down 11% in January – May versus 2014
  • Total lending was down 15% in H1 versus 2014, with shadow lending down 50%
  • And electricity consumption, his 3rd data point, was up just 1.2% in H1, as the chart shows

As the chart shows, electricity consumption has been an excellent real-time indicator for the economy in recent years.  It took off like a rocket in H1 2010, rising 21% versus 2009, and it stayed strong at 12% in 2011 before halving to 6% in 2012.  2013-2014 saw it stabilise at 5%, and clearly a further decline is now underway.

But with China’s working age population now falling, there is less pressure on the government to intervene to support job creation in order to maintain social order.  Equally important is that growth in the services sector seems more robust, as the focus on developing the ‘mobile internet’ policy pays off.

The main problem areas are clearly in:

  • Manufacturing, where excess capacity is widespread
  • Luxury items such as cars, where spending had been artificially boosted by previous stimulus policies

AUTO SALES ARE WEAKENING AND PRICES ARE UNDER PRESSURE
Auto sales are clearly under major pressure.  New data from China’s Association of Automobile Manufacturers shows total H1 sales up just 1.4%.  And the trend is downwards with June sales falling by 2.3%.

Dealer inventories are also continuing to climb with China’s Automobile Dealers’ Association reporting its “Vehicle Inventory Alert Index” rose to 64.6% in June, up from 57.3% in May and well above the alert threshold of 50%:

  • Prices are now being cut quite dramatically in an effort to clear stock
  • Discounts were being offered on 70% of cars shown at this month’s International Automobile Expo
  • State-owned Xinhua has separately reported dealers were selling below cost price to raise cash
  • The 30% collapse of the stock market is likely to further hit sales in Q3

But unlike in 2008-9, there is little sign of government panic.  Ed Zhang, editor-at-large of China Daily instead notes:

“China is already a nation with a considerable number of people looking for a quick return on their money. Rather than letting those people invest their money in companies they hardly know anything about via the stock market, or buy houses in foreign cities where they can hardly live, the government should put their resources to a better and more profitable use.”

And he goes on to make a critical point with regard to future policy, namely:

Don’t blame reform for the stock market crash.  Rather it is a lack of reform that gave rise to the recent nosedive in indexes.  The lack of reform comes from 2 things, like 2 sides of the same coin:

  • “One side is the lack of a truly centralized regulatory regime for the financial market and due protection of the key interests of small investors
  • “The other side is a lack of a truly competitive market and diverse investment instruments”

Contrary to the concerns of many analysts, it appears that the stock market collapse has in fact discredited those who had argued for further stimulus.  Instead, it has strengthened the hand of President Xi  with his focus on carving out the New Normal direction.

As China Daily sums up the debate in another analysis, “Bubbles can be created in a short time, but companies need to grow over a relatively long period“.

Those expecting a new and massive stimulus programme are therefore likely to continue to be disappointed.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 45%
Naphtha Europe, down 45%. “Higher freights for long-range vessels have made the Asian arbitrage harder to work”
Benzene Europe, down 41%. “US Gulf market in particular seems to be pushing and pulling European prices”
PTA China, down 36%. “Prices were largely lower week on week, tracking continued excess supply and bearish sentiments in the market.”
HDPE US export, down 19%. “Most export spot prices held steady during the week.”
¥:$, down 21%
S&P 500 stock market index, up 9%