Any discussion of China has to open with the now-widely-understood fact that
the numbers it reports are not to be trusted. Knowing this makes it easy to
dismiss claims of high and consistently-on-target GDP growth, for instance,
as a combination of government-directed borrowing and spending, and simple
fabrication.
But how to handle negative numbers? When a serial fabricator admits that things
are bad and getting worse, that would seem to imply that someone at or near
the top has concluded that either the facts can no longer be obscured or that
there's an advantage in creating negative expectations.
Whatever the purpose, the most recent batch of stories is both strange and
scary. For example:
China's
stock crash is spurring a shakeout in shadow banks
Peak
insanity: Chinese brokers now selling margin loan backed securities
Here's a pretty good summary of current trends from Reuters:
China
under mounting pressure to ease policy as economy stumbles
China is under growing pressure to further stimulate its economy after disappointing
data over the weekend showed another heavy fall in factory-gate prices and
a surprise slump in exports.
Producer prices in July hit their lowest point since late 2009, during the
aftermath of the global financial crisis, and have been sliding continuously
for more than three years.
Exports tumbled 8.3 percent in the same month, their biggest fall in four
months, as weaker global demand for Chinese goods and a strong yuan policy
hurt manufacturers.
"Policy focus is definitely the (producer) deflation at this stage," said
Zhou Hao, economist at Commerzbank AG in Singapore.
He said China's central bank would likely need to further cut interest rates
again, having already cut four times since November in the most aggressive
easing in nearly seven years.
The gloom may only deepen in the coming week with a raft of economic data
forecast to show renewed weakness in factories, investment and domestic spending.
The world's second-largest economy is officially targeted to grow at 7 percent
this year, still strong by global standards, but some economists believe
it is growing at a much slower pace.
Economists expect the central bank to cut rates by another 25 basis points
this year, and further reduce the amount of deposits banks must hold as reserves
by another 100 basis points, according to a Reuters poll last month.
The producer price index fell 5.4 percent from a year earlier, the National
Statistics Bureau said on Sunday, compared with an expected 5.0 percent drop.
It was the worst reading since October 2009 and the 40th straight month of
price decline.
Falling producer prices are worrying because they eat into the profits of
miners and manufacturers and raise the burden of their debts. China's corporate
debt stands at 160 percent of gross domestic product, twice that of the United
States, according to a Thomson Reuters study of over 1,400 firms.
In line with the sluggish economy, annual consumer inflation remained muted
at 1.6 percent despite surging pork prices, in line with forecasts and slightly
higher than June's 1.4 percent.
CHALLENGING SECOND-HALF
A cooling housing market, uneven exports and weak investment have cooled
annual economic growth, which will be slowest in a quarter of a century even
if it hits Beijing's target this year.
A strong yuan policy - designed in part to support domestic consumption
and help Chinese firms to borrow and invest abroad - is hurting exporters.
Trade data on Saturday showed depressed demand from Europe and the first
drop in exports to the United States, China's biggest market, since March.
Chinese firms have laid off workers for 21 consecutive months as they slash
prices to a six-month low to attract customers, an official survey showed
this month.
China's turbulent stock markets, which have fallen by almost a third since
peaking in June, also add a new sense of urgency for top officials as they
try to ensure a stable financial system can fund Beijing's efforts to rekindle
economic growth.
Yet, even the central bank has warned that looser policy may not be effective
in lessening the pain felt by companies.
Companies are holding back on spending amid a reluctance by banks to lend
due to rising bad debts.
"Maintaining a growth rate of 7 percent in the second half of the year will
be a challenge," ANZ Bank said in a note at the weekend. "Monetary policy
will need to become more supportive."
Some thoughts
There's a lot going on here: a stock market crash, banking crisis, corporate
layoffs, slowing growth, deflation. And it's a safe bet that the people in
charge are unfamiliar and/or uncomfortable with the mechanisms that define
markets, which makes the above trends even more confusing and threatening than
they would be otherwise.
But most of it comes back to the strong dollar. Since China's yuan is pegged
to the greenback, when the latter rises so does the former. A soaring currency
is always problematic, but it's especially dangerous for an export-driven economy.
So add China to the list of developing country victims of the end of US QE.
Put another way, China's massive post-2008 borrowing is analogous to those
dollar "carry trade" loans incurred by Brazil, Thailand, et al, which have
become increasingly burdensome as the dollar has risen. Put yet another way,
the real taper tantrum is happening overseas rather than on Wall Street.
"Economists expect the central bank to cut rates by another 25 basis
points this year, and further reduce the amount of deposits banks must
hold as reserves by another 100 basis points, according to a Reuters poll
last month." Obviously that won't help, and will be followed by
either (much) more of the same or something different and more dramatic.
Devaluing the yuan by adjusting or eliminating its dollar peg comes to
mind, as does some kind of explicit "bazooka" QE program (though this is
arguably already under way via equity market interventions). But who really
knows?
Whatever it does, China's next step will have to be commensurate with the
magnitude of its recent malinvestment, which is to say gargantuan. After the
fastest-ever rise from Third World to World Power, the biggest-ever debt binge,
one of the biggest, most sudden equity bubbles and subsequent busts, China
is about to make history at least one more time.
