Even though it is risky to be skeptical when at a remove, we had trouble buying into the bullish talk on China. First, in the Great Depression, it was the creditor/exporter America that had a far more difficult adjustment than the wastrel debtors, who simply defaulted. Second, the stimulus package, which has been widely touted, consisted to a significant degree of spending already in the works. Only 20% of it was truly new spending, and much of that scheduled for the second year. Third, Michael Pettis provided anecdotal evidence that the touted increase in lending consisted to a significant degree of wash transactions booked to please authorities, and other sources said that a good portion (as much as one-third) went into the stock market, meaning it did not help the real economy.
The Financial Times provided a cautionary note on Monday:
China’s much vaunted Rmb4,000bn economic stimulus package is being delayed by local governments unable to raise their share of financing, according to a report from the state auditor.
The survey, published yesterday, is the first official indication that China’s stimulus measures have not been as effective as the government claims.
Reuters provided additional sightings today:
China’s economic recovery may have slowed or even gone slightly into reverse over the past month, two international banks said in separate reports.
Credit Suisse economists said economic activity appeared to have softened in the second half of April and that the trend was more pronounced in May, with weakness in the materials sector and power consumption spreading to retail sales.
“We argue that the recovery in China is still ongoing, but that the pace may not be as strong as many have hoped recently,” Dong Tao, Asia economist at Credit Suisse, said in a report.
He forecast that the Purchasing Managers’ Index might slip below the watershed of 50 over the next few months, suggesting that the Chinese manufacturing sector was contracting.
Economists at Merrill Lynch said the PMI, which has been closely watched by the market as a leading economic indicator, would soften but remain above the 50-point mark, pointing to a milder expansion.
“Although manufacturing investment growth is not as strong as that of infrastructure, it has actually picked up so far this year, and we believe the momentum could be maintained for another several months,” Merrill Lynch economists Ting Lu and T.J. Bond said in a report.
“We need to factor in seasonality and focus on the big picture: the V-shape recovery of PMI,” they said, noting signs of more property transactions and faster investment growth.
In addition, Chinese power production, seen as a good proxy for economic activity, fell in early May.
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Quite a bit of unrest going on too, and not the yawn-style events that happen in the US. Big protests in Nanjing in the last week. 58,000 mass incidents in the first quarter of 2009.
The unrest no doubt has the power structure’s complete attention. Historically Chinese regimes are periodically shaken and sometimes overthrown by monumental uprisings.
China’s model is no more sustainable than America’s, since the relationship is completely symbiotic and codependent, ergo the term “Chimerica” (with special reference to “chimera”).
They badly need to resume astronomical growth in the middle term; at the moment they even more desperately need the simulacrum of resumed growth and green bamboo shoots. Thus the legerdemain Yves’ post refers to.
Victor Shih argued that the local governments are already bankrupt. Given that 3/4th’s of the 4tr rmb stimulus is supposed to come from the local gov’ts its no wonder that, according to FT, “some projects have been unable to start on time while others have proceeded slowly because of a lack of funds, according to a survey of 335 stimulus-related in-vestment projects conducted by the National Audit Office” and that “China’s stimulus measures have not been as effective as the government claims.”
In addition, from this morning, Fitch on the recent surge in Chinese lending: “This emphasis on short-term profit may be contributing to excessive risk-taking by banks, particularly in corporate lending, which could lead to material losses in these portfolios,”
I think what fitch is trying to say is that there are only so many empty office buildings that can be constructed before chinese banks start going bankrupt (again).
Make no mistake, mercantilism is a just veiled form of leverage where off-balance sheet liabilities pile up and eventually require attention.
Thank you for a very interesting post (…and also for some great comments, too). Additional information on this same topic is provided by these two excellent analyses, accessible at:
http://www.globalsecuritieswatch.org/PRC_Sovereign_Risk_Review.pdf
and
http://www.garpdigitallibrary.org/download/GRR/2089.pdf
Craig