Rather than listen to that demonstrably and now detestable traitor called Martin Wolf at the Financial Times - but who reads him anymore, anyhow? -, here are our friends at the FT Alphaville: this is must reading for all patriots pursuing the relentless fight against the Chinese Dictatorship. Enjoy, friends!
It's been a breathless year for China-watchers.
If
the news flow from Trump's ongoing trade war with the People's Republic
wasn't enough to wrap your head around, there are also re-emerging
concerns over slowing growth, a bubbly real estate sector and a depreciating currency. Oh, and some stuff in Hong Kong.
But away from the noise, how are Chinese corporates faring?
A discussion
in the Long Room drew our attention to GavekalDragonomics annual “China
Inc” report — a chartbook “based on two major data sources: the
nationwide survey of 374,000 industrial firms, and the financial reports
of 3,230 listed non-financial firms”.
Below is a compressed
glimpse of a few of the charts, which perhaps tie in with some of the
concerns listed above. (Right-click charts to embiggen.) Sales growth is rolling off . . .
So
sales by consumer-facing firms -- car companies, food-producers and the
like -- have begun to slow, while IT and healthcare firms, bar
semiconductor-manufacturers, have at least maintained growth.
The
southbound lines in the left-hand chart speak to an ongoing struggle in
China: its tanker-like pivot to becoming a consumption, rather than
investment, driven economy. As flagged by our colleague James Kynge, and ex-Alphavillain Matt Klein, China's consumptive spurt since 2007 has been fuelled by debt, rather than income:
More recently, Allianz found that in 2017, household debt hit a record 49.1 per cent of GDP, 19.2 percentage points higher than 2012's figure.
News
over the summer of a wave of defaults in China's $190bn peer-to-peer
lending industry — shadow-banking platforms which divert short-term
savings to households — perhaps signals the brakes slamming on this
trend. But, as Matt argued,
with workers earning a much smaller share of non-financial corporate
value than other countries, circa 40 per cent versus two-thirds
elsewhere, consumers now have few other means to grow their spending
power. Coupled with trade fears, one wouldn't be surprised to see this
trend continue. Debt servicing is on the up, well for corporates anyway
Two
diverging trends here. China, on a national level, is requiring more
and more cash to service its debts. Not good news for those concerned
about the Republic's burgeoning debt burden, estimated to be anywhere
between 300 to 350 per cent of GDP, depending on who you ask and what
mood they're in.
This hasn't deterred bond buyers however, as the
IMF recorded a circa $40bn flow into yuan-denominated bonds over the
second quarter of this year, according to Brad Setser at the CFR:
But
on a corporate level, China has become better at meeting its interest
payments, maintaining a coverage ratio of 4, up from below 3 in 2015. On
a sector basis however, concerns still persist about corporate debt.
For instance in real estate, despite core profit margins expanding 12.3
per cent in the first half of the year, the ratio of developers' cash to
short-term debt declined from 2.4 to 1.8 times, according to research
by China Merchant Securities.
These forking trends — total
interest coverage declining, but on a corporate basis improving —
suggests debt simply shifting across economic sectors, rather than
improving on a net basis. China's exporting corporates require a lot of labour
This chart shows revenue per worker versus a percentage of sales from exports in China's corporate sectors.
One
clear takeaway from this chart is electric machinery and equipment
(and, to a lesser extent, straightforward machinery) is going to be the
sector-to-watch as the trade war deepens. Of course, protecting
America's machinery sector has been a key objective of the Trump
administration because a) there are still around 1.6m workers making
machines and tools in the US and b) the sector has resumed growth under
Trump. Just check out this chart from Brendan's post a few weeks back:
If
Trump's tariffs begin to bite, we could therefore see a
disproportionately negative effect on employment in these sectors,
which, coupled with tightening credit conditions, would not be good news
for household incomes.
So consumption looks set to remain
repressed. How is China going to maintain growth then? More debt of
course! Just last week the People's Bank of China cut reserve requirements
for commercial banks, in effect sanctioning a further $109bn of credit
creation. We've seen this playbook before; whether it is consistently
repeatable, is another matter:
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