Saturday, 11 May 2019

Debt Building Up in China - A Time-Bomb Waiting to Explode

This story just in from The Wall Street Journal. Please note that the growth rates for GDP are from the Chinese Dictatorship. In reality, China's GDP is now definitely in contraction. The discrepancy has to do with how we measure GDP and with the environmental and social costs of what is misleadingly called "growth" in China. Of course, there are many ways to kick the can of "growth" down the road by hiding or not accounting for the debt building up in the financial system - which is what this article emphasizes.

May 11, 2019 7:00 a.m. ET
A new round of U.S. tariffs poses a big challenge for Chinese officials trying to manage an already-stumbling economy.
Having just pumped heavy doses of stimulus into their system to manage a slowdown, do they now pump in even more and risk exacerbating long-term problems, such as the economy’s heavy reliance on debt?
China’s economy buckled last year, and it wasn’t all because of the trade fight with the U.S.
Beijing launched a campaign two years ago to crack down on lightly regulated lending sources known as shadow-banking firms. Private firms that relied on these lenders found themselves short of cash, and a slew of defaults on bonds and notes issued by the private firms roiled markets and dented confidence. Central bank Gov. Yi Gang acknowledged the debt crackdown hurt private businesses.
tariff cease-fire declared by President Trump and Chinese President Xi Jinping in December helped restore confidence, buying time for Beijing to spur economic growth. Beijing ramped up spending by both the central government and local governments, particularly on large infrastructure projects, and relaxed restrictions on shadow banking.
The amount of stimulus injected into the economy in the first three months this year was stunning to some analysts. Larry Hu, an economist at Macquarie Group, says policy makers went into “panic mode,” pumping 2 trillion yuan to 3 trillion yuan ($293 billion to $439.5 billion) of extra spending and credit into the economy. Government spending on rail, highway and other transportation projects jumped 47% in the first quarter from a year earlier.
Outstanding credit growth—including bank loans and bonds issued by companies—grew 10.7% at the end of the first quarter from a year earlier, central-bank data showed. Local governments used up 40% of their annual new-bond issuance quota in the first quarter alone, leaving limited room for localities to borrow later in the year, Moody’ssaid.
The efforts seemed to pay off: The economy expanded 6.4% in the first quarter from a year earlier, according to government data. The pace was the same as the end of last year—pointing to stabilization—and industrial production, lackluster at the start of the year, roared in March.
But some analysts worry that China’s ammunition is becoming constrained. After tax cuts, total tax revenue growth slowed sharply in the first quarter due to a drop in personal income tax collections. Slowing revenue but faster spending drove up the central government’s deficit. The government targets a deficit of 2.8% of gross domestic product this year. Economists say the actual deficit is already on track to top that target.
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Worries about excessive borrowing nag at officials. A statement issued after the Communist Party leadership’s Politburo meeting last month mentioned the need for long-term deleveraging for the first time since late last year. Credit growth, including bonds and loans, slowed in April. Big-city governments have also started tweaking controls to limit housing purchases, a sign that some of the easy credit unleashed earlier this year is feeding renewed property speculation.
Some economic indicators have started to look wobbly again. Activity in the manufacturing sector dropped unexpectedly last month. Exports fell, too. Many suppliers of machinery and industrial and building materials say any pickup in activity from earlier this year had eluded them because their costs were also rising.
“It’s hard to say how this year will turn out. Let’s see how this summer goes,” said Duan Zhimin, general manager of Baoding Lenno Composite Materials Co., a maker of industrial tapes and film used in trains, aircraft and wind turbines. New orders, he said, are falling.
Under President Xi’s reign, whenever there is a trade-off between short-term growth and long-term structural reform, growth has taken priority. Early in the year, when growth was staggering, Mr. Xi used the term “stability” in a speech a dozen times.
Shortly after President Trump threatened new tariffs this month, China’s central bank announced a cut to the portion of deposits set aside as reserves for some smaller banks in an effort to boost lending for private firms. Many in the financial and business communities took it as a sign that more easing may be ahead.
Investors and policy makers may have been a bit too optimistic about recent signs of a spurt in economic activity, say analysts at Nomura International. The sudden escalation of trade tensions and the recent selloffs in the stock market could convince Beijing to take further easing measures to stabilize growth, the bank said.
Another challenge looms. Prices are rising, and not just for food due to the deadly virus decimating pig herds, but also for producers and services. That, says Sealand Securities economist Fan Lei, raises the prospect of stagflation—when economic growth cools but prices heat up. Liu Guoqiang, a central-bank deputy governor, said after a briefing last month that rising pork prices are on officials’ radar.
Mr. Hu of Macquarie sees the risk of a further slowdown following a brief stabilization in economic growth. He expects economic growth to slow to 6.2% in the second half of the year. Stimulus and a growth spurt came quickly this year, he said, and they may be gone fast, too.
—Liyan Qi

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