China lend May15
Everyone seems sure that China’s government is about to undertake major new stimulus.  Thus Reuters reported:

Economists said it was a matter of when, not if, China eased policy again after economic growth in Q1 cooled to 7%, a level not seen since the depths of the 2008/09 global financial crisis.  Indeed, some analysts have even said recently that the PBOC had fallen behind the curve by not responding aggressively enough to deteriorating conditions.”

The only people who seem to have failed to get the message seem to be the government itself. As I discussed yesterday, they instead seem more worried about the likely problems associated with the Great Unwinding of stimulus policies.  And they seem in no mood to take any step in the direction of further stimulus themselves.

This is creating a most bizarre situation in world markets.  News media and analysts seem to have stopped talking about the obvious slowdown underway in China’s economy  – presumably on the basis that this is already ‘old news’ as vast stimulus is just about to happen. Yet the slowdown is real, and growing in momentum:

  • Fixed-asset investment rose only 12% in January-April versus 2013, the slowest pace since December 2000
  • Government and private sector spending growth slowed, mining saw a sharp drop, new project spend stalled
  • Property investment growth slowed to 6% in January to April, the weakest level since 2009
  • Housing inventories are very high outside the Tier 1 cities, at up to 3 years
  • New property starts fell 17%, hitting demand for cement, steel, polymers, furniture and appliances
  • Car sales actually fell in April, despite price cuts of up to 25%; some dealers now have 6 months inventory

It has also been clear, as we argued in The pH Report more than a year ago, that China’s new leadership are determined to slow the economy in order to bring the lending bubble they inherited under control.  And the chart above shows they are succeeding:

  • Total Social Financing (TSF eg official and shadow bank lending), was down 18% at the end of April versus 2014
  • Shadow banking was down an astonishing 55%, highlighting the property bubble squeeze (red area)
  • Official lending, necessary to maintain liquidity in the banking system, was up just a minimal 14% (green)
  • And this is the continuation of a trend, as shadow banking fell 21% in 2014, and TSF fell 5%

One day, perhaps not too far away, we will all have to take off our rose-tinted glasses and recognise the reality of the policy shift underway in China.  Its New Normal is the reverse of the previous policies of the ‘lost decade’, when $6,8tn was “wasted“.  It is not a continuation by another name.

President Xi was being very serious when he told China’s economic policy-making policy conference that “The good meat is all gone; all that is left are hard bones to chew”.