China Economy Thoughts for the Day
- The explosion in credit is having an impact on the real economy. From real estate to commodity output, there is at this point no doubt that credit boom is having its intended effect. Whatever problems they are creating at the moment, at least Beijing gets to enjoy the stability of the moment.
- Much has been made of the Xi-Li political battle, which may or may not even exist for all anyone really knows, but another less recognized battle is being fought between Beijing and the provinces. Most people outside of China, and even many inside, fail to grasp the degree to which provincial leaders from the political to the bankers have their own agenda and do what they want regardless of Beijing edicts. It is easy for Beijing to tell a province to shut down an old, low capacity steel mill. However, when say 50% of your local government revenue comes from that mill, public leaders will have a very different agenda. I have been told of numerous cases where provinces of ensuring that things stay open because the town or government is simply too dependent on it. There is a reason Beijing wants video tape of mill demolitions but early returns indicate, Beijing is not getting what it wants. The credit boom is keeping everything humming for another day.
- The Chinese bond market is not really a market, it is another avenue for local governments to tap cash. Almost two-thirds of all Chinese bonds now are government.
- The other part of this story is the large twist underway. Not only are Chinese local governments and key firms refinancing their debt with banks forced to buy at mandated prices, but they are twisting into longer dated maturities. Before, most Chinese fixed income and bank loans were very short maturity products, typically one year or three at the most if you were a big well known, well connected firm. Even local governments had most of their financing under 1 or three years. Almost none was any longer even for large infrastructure projects. Part of the driver here is not just lowering the financing costs, but putting a lot of this into 7-10 year bonds. This is true not just of local governments but the corporates that are issuing.
- The next investment bank or dimwit that use “China” and “deleveraging” in the same sentence other than to say it obviously isn’t happening is getting called out by name. I actually read an IB report this week that actually wrote that China is “kicking off its corporate deleveraging process”. If GDP goes up by say 6.8% and debt is rising 31%, it ain’t happening. Stop embarrassing yourself or I will point out the absurdity.
- The China bull argument is now entering yet a new phase. Previously, they argued that China data was accurate which though it took some convincing, even most of them no longer believe. Then it moved into arguing that it wasn’t that Now the new normal for China bulls is to just make stuff up. Even when all data says China isn’t deleveraging, some people tell us not to believe either the official or unofficial data that says China isn’t but instead this time “Beijing really means it and we should believe them.”
- The bad loan crisis that numerous people (read hedge funds) is not happening anytime soon. Get used to it.
- The economy is not rebalancing. In fact, based upon the data so far this year, it is becoming even more unbalanced. Not that it was rebalancing last year, but this year is even worse. The only service really growing rapidly? Financial services and guess where that service activity is going. Hint: it’s a big hole in the ground. Real estate, coal, and steel.
- Alibaba numbers are just as good as Beijing’s GDP data.