China Continues To Ease Off The Growth Pedal

THE LATEST MONTHLY economic data show China’s economy is steadily decelerating its pace of growth. This Bystander chooses that formulation rather than, say, ‘China’s economy faces slowing growth’ because managing the transition from double-digit rates of growth in the fast-growth industrialization phase of development to lower but more sustainable growth rates as the economy becomes less dependent on infrastructure-investment and export driven growth is now the primary task of policymakers.

We knew from last month that first-quarter GDP growth was lower than in any quarter since the third quarter of 2012. We take further encouragement from the new raft of numbers showing fixed-asset investment between January and April grew at its slowest since 2001, at 17.3%; new property construction fell 22.0%; and aggregate new credit fell to 1.55 trillion yuan ($249 billion) in April from 2.07 trillion yuan in March. These are signs that the country is adapting to what President Xi Jinping called a few days ago the “new normal” slower pace of economic growth.

Along with that comes a slowing of the growth rate of industrial output. Year-on-year, it was up 8.7% in April, down from March’s growth rate of 8.8%. That might in the past have been a cause to open the credit taps, especially as the most recent monthly consumer price inflation figures show inflation at just 1.8%, an 18-month low. But not, we believe, this time — and especially as there are still demons lurking in the background among the unsustainably high levels of corporate debt and industrial overcapacity, the ricketiness of shadow banking and a property bubble that is far from being safely deflated.

 

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People’s Bank Of China Sounds Grim

Central bankers are not noted as being wide-eyed optimists at the best of times. China’s are living up to the stereotype. The world’s investors are regaining some of their animal spirits on the strength of new signs that the slowdown in China’s economy is at last ending, but China’s central bankers are striking an ultra-cautious note in their  third-quarter monetary policy report.

They warn that global demand could slump again unless the crisis in the euro zone is sorted out, sending the world into a double-dip recession. As for China’s part of the world economy, ‘the foundation of an economic recovery is not yet solid”. The People’s Bank of China’s policy focus will emphasize growth, but monetary policy will remain “prudent”.

The central bank fears that measures to promote domestic consumption are potential inflationary, even though inflation is subdued despite rising energy prices and labour costs. Year-on-year consumer price inflation was 1.9% in September, down from 2% the previous month.

No mention of further cuts in interest rates or banks’ reserve requirements. Playing with the short-term liquidity taps, as was done with the $60 billion injection into the money markets earlier this week, is the sort of open-market operation the central bank now prefers to “fine-tune” the economy, regardless of the risk of more volatile short-term interest rates. It is a way to talk tight but act loose, and still be able to switch back to acting tight at short notice.

Manufacturing Output Taxes China Policymakers’s Patience

Another sign that the slowdown in China’s economy hasn’t yet bottomed out: The official Purchasing Mangers’ Index (PMI) for July unexpectedly fell to 50.1 from June’s 50.2, it’s lowest level in eight months and barely above the 50 level that separates contraction from expansion. Meanwhile HSBC revised its unofficial PMI, which is weighted more towards activity in small and medium sized manufacturing companies. July’s figure was cut to 49.3 from the 49.5 initially reported last week. That is still up from June’s 48.2, however, albeit in contractionary territory.

The government has been easing monetary policy and allowing bank lending to rise to fund brought-forward infrastructure spending, saying growth and stabilizing the economy is its main priority. It does not want to go so far in that stimulative direction, however, that it risks reinflating the property bubble it has worked so hard to deflate gently. It has been refraining from further interest rate cuts and committing to public-sector infrastructure investments it can’t dial back on in the hope that growth will pick up in the third quarter and that it can ride through the short-term unemployment pressures. Numbers like these latest PMIs tax its patience.

China’s Dilemma In Responding To Slow Q2 GDP Growth

We were expecting a weak second quarter GDP figure, and China hasn’t disappointed. Its economy grew by 7.6% between April and June, down from the first quarter’s 8.1%. That was sixth consecutive quarter of slowing growth, and the slowest quarter since the immediate aftermath of the 2008 global financial crisis. Though the number was in line with analysts’ expectations–and the expectations the government is trying to set for its citizens long used to double-digit growth–the nagging question is whether there is a bottom in sight, and thus the extent of the further stimulus policymakers need to provide in response.

The conflux of cyclical and structural slowdown makes this more difficult to get right. The usual remedy of infrastructure spending via state-owned enterprises delays the necessary rebalancing of the economy that will provide the long-term growth of the future. Beijing won’t want to reverse its measured deflation of the property bubble or risk a sovereign debt crisis blowing up as it tries to defuse the local government debt bomb. A mess of either sort is not the economic legacy the outgoing leadership will want to hand on to its successor.

Like governments in developed countries, Beijing has to face the fact that it is neither the price nor volume of money available that is the problem now but the lack of demand. In China’s case changing that means structural reforms, both to put private capital to work and to free up consumer savings for both that and consumption. If there is a silver lining to the current dark economic clouds, it is that financial reform in China tends to be easier to push through when the economy is going through rough spots than it is when the economy is charging ahead gloriously.

China’s Coal Piles Up

One of this Bystander’s irregular indicators of economic growth, coal stocks, suggest that the slowdown in China’s economy has yet to bottom out. State media report that the piles of coal sitting at the main coal ports of Qinhuangdo, Tangshan and Huanghua were at record levels at the end of last month, at 18.3 million tonnes between them. A month earlier, they had reached 16 million tonnes.

At Qinhuangdo, China’s main coal port, stocks have fallen from 8.9 million tonnes to 8.6 million tones. Yet as maximum capacity there is 9.2 million tonnes what coal that is needed will likely have been taken from there first. Tangshan is also bumping up against its maximum storage capacity.

Overall the country has 300 million tonnes of coal in reserve, equivalent to at least a month’s consumption. Some 75% of China’s electricity is generated by coal-powered plants and power generation accounts for two-thirds of China’s thermal coal consumption. Electricity consumption, another of our irregular economic indicators, grew by 5.8% in the first five months of the year, down from 12% in the same period a year earlier. Other big coal users, including steel and cement makers, have also seen their businesses slow. The coal industry is now expecting the slow down in demand to continue into the third quarter, despite it usually being the peak months for power consumption.

Slow Burning Coal

Changes in electricity consumption are a rough and ready proxy for GDP growth. In the first five months of this year, China’s electricity consumption grew by 5.8%. In the same period last year, it grew by 12%. To this Bystander that feels like a better measure of the extent of the current slowdown than the official GDP numbers.

One other irregular but related measure of economic activity is how much coal is stacked up at the docks. China generates more than two-thirds of its electricity from coal. There is a lot of it right now. Coal stockpiles at China’s largest coal port, Qinhuangdao, reached 8.8 million tonnes earlier this month, up from 7.8 million tonnes at the end of last month and approaching record high of 9.2. million tonnes in November 2008 during the depths of the global financial crisis. Typically, stocks are in the 6 million-7 million tonnes range.

It is a similar story at Hebei’s other coal ports, Huanghua and Tangshan, and at Guangzhou and Fangcheng in the south. In all there are around 20 million tonnes of coal with nowhere to go. The six large power generators in eastern and southern China now have enough coal stockpiled for more than a month’s generation.

China’s May Trade Data Surprise Baffles

What is so surprising about China’s trade figures of May, released today, is not that they so outstripped  analysts’ expectations, but that both imports and exports seemed so strong. In raw value, they were record breaking. Exports rose 15% year-on-year, to $181.1 billion, with a significant rise in shipments to the U.S. and even a trade with the E.U. rebounding. May’s imports rose by 12.7% year-on-year to $162.4 billion. The monthly trade surplus edged up to $18.7 billion, $300 million higher than in April. In the first five months of the year, exports to the slow-growing U.S. rose by 12% and even those to eurocrisis-gripped Europe rose 1.3%.

The May trade numbers drive such a brilliant shaft of light through the gloom of the other economic indicators released in the past few days, that this Bystander wonders if they are simply an aberration, an ever-present risk with monthly data. Yet, they could also be a harbinger of a brake to the slowdown in growth that sparked the surprise 25 basis points cut in interest rates last week, an aggressive easing of monetary policy that saw higher than expected bank lending in May, and talk of a new stimulus package, albeit not one using the S-word. If that indeed is the case, more spending, by way of advancing planned social infrastructure spending, could remain in reserve.