These lines from the great poet TS Eliot seem to sum up current thinking towards China. Analysts compete with themselves to spy stimulus where in reality there is none. Often this is because they are young, and have only known a world where economic policy = stimulus. But reality says that China can’t do more stimulus.
As Premier Li told the National People’s Congress in March:
“The difficulties we are to encounter in the year ahead may be even more formidable than those of last year. China’s economic growth model remains inefficient; our capacity for innovation is insufficient; overcapacity is a pronounced problem and the foundation of agriculture is weak. Growth in investment is sluggish; the number of new areas of strong consumer activity is limited; there is no sign the international market is about to significantly pick up; maintaining stable growth is becoming more difficult.”
How would more stimulus help solve any of these fundamental problems? It could only perpetuate them. And as we now know, Li was absolutely right to suggest that 2015 would be more difficult than 2014.
The core problem is that China’s post-2008 recovery was built on the largest lending bubble that the world has ever seen. Official data shows that China’s total social financing (its total lending, or TSF) was $16.8tn between 2009 – 2013. By comparison, its total GDP in 2008 was only $4.6tn.
The biggest increase was in the so-called “shadow banking” sector, outside official channels. This was the route used to finance the property bubble, which led to the average Beijing home selling at a ratio of 14.5x average earnings – twice the average seen at the top of the US sub-prime property bubble. But now, the size of the shadow sector is falling rapidly, as the chart shows:
- It reached an out-of-control 72% of TSF in December 2012
- Since then, it has been squeezed hard: 2015 has seen 2 months (July, October) where it actually shrank
- It is averaging just 10% of TSF so far in 2015, versus 42% in 2012-2013
As a result, total TSF funding has been falling since 2013. It was down 5% in 2014, and is down 9% so far in 2015.
That is the reality of the lending picture, which of course confirms the reality of China’s economic slowdown. But as Eliot suggested, “humankind cannot bear too much reality”. Thus the same analysts who argued that China had suddenly become “middle class” as a result of stimulus and the property bubble, are now hoping for new stimulus.
Wishful thinking, however, is not a good basis for running a business or an investment portfolio. What continues to amaze me is that people still spend so much time discussing a possible 0.25% increase in US interest rates – and ignore what is happening in China. Its lending stimulus was 4x that of the Federal Reserve, and its slowdown is far more important to the global economy than anything the Fed might do next month.
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 56%
Naphtha Europe, down 54%. “Asia is expected to be the main outlet for European naphtha in the fourth quarter of 2015”
Benzene Europe, down 55%. “Oversupply recently seen has been cleared out through exports to the US Gulf.”
PTA China, down 41%. “Market fundamentals still depend on the confirmed restart and production dates of the producers’ production lines”
HDPE US export, down 35%. “Prices for domestic exports remained stable”
¥:$, down 20%
S&P 500 stock market index, up 4%