First day back and why not read a big report on China? Exactly! What could be better? The IMF report is one the best analysis I have seen on the Chinese economy and although not critical it points out a lot of issue and short comings/contradiction in the Chinese outlook.
International Monetary Fund – People's Republic of China – 2018 Article IV Consultation
The IMF is concerned about credit growth remaining in excess of GDP growth – forever it seems.. It's 3 credit dollar to create 1 growth dollar now…. The report is full of fundamental understanding of the Chinese economy and model. Below is my notes only – I suggest looking through the report yourself, but find my "copy and paste" below plus a link to a FT – Big Read article from today:
Conclusion:
China OVER-estimated their ability to de-leverage without growth cost
The progress/improvement is happening but too slow relatively….SOE and too much credit remains key issues
SOE – State owned enterprises remains too much of a tax on overall economy…. Profit improving too slowly…
There is contradiction in getting higher quality growth without pain….
Recently(most my comment) China have reversed course on the "reining in credit" and accepted more fiscal spending in violation of mantra – a sign of some nervousness?
China real growth is probably significantly lower than reported and cracks are opening up in banking and regional funding system, but China is a formidable economy and next 12 month will mirror how China in 2008 expanded fiscal policy and dropped SHIBOR (3 month) from 4.5% to 1 ¼% leading to higher non-US growth and leading Dollar lower and probably China prone economies like Australia and South Africa stronger in both growth and currency terms.
This could also be low in EM risk, but more information is needed and the Q2 US growth will need to be peak (Which I expect) – The global politicians including China is re-loading the fiscal guns despite no room on finances! This is major policy mistake
IMF copy-and-paste by me:
….China moving from business model of high-speed to high-quality growth……
Staying the course on reining in credit growth…..
They saw the recently announced package of opening-up policies as being in the right direction…
"Fix the roof while the sun is shining…." Should be the modus operandi……five key areas of focus
1. Continuing to rein in credit growth
2. Accelerating rebalancing efforts
3. Increasing the role of market forces
4. Fostering openness
5. Modernizing policy frameworks
2018 marks the 40th anniversary of China's "reform and opening-up" policy, 800 million people lifted out of poverty since the reform started…
The CCP – China's Communist Party goals remains meeting people's basic needs" – "ever growing needs for a better life"……The Solution is a change to supply-side structural reforms. A host of measures aimed at tackling structural weakness such as overcapacity, excess housing inventory and high leverage; and the "Three critical battles":
1. Addressing financial risks (stabilizing debt/GDP ratio in three years)
2. Eliminating absolutely poverty
3. Tackling pollution
There is change of focus/intent from demand-side stimulus……also high on agenda is new growth engines and promotion of national competitiveness through innovation, industrial upgrading and further opening up.
Left chart:
Significant clamp down on Wealth Management Products shown (blue line)
Social financing coming down hard but still in excess of growth (6.5% vs. 11-12%)
Right chart:
Bank assets as pc of GDP falling – first time since 2011…..which also equals "less ability to lend"…
The following chart shows a disturbing fact: All sectors of economy is driven by….more debt – at least in the US households are stable.. but rest also rising…
SOE – State owned enterprises – continues to lose a lot of money:
This is VERY interesting point – the credit efficiency is improving as technology needs less capital than production….
Here is VERY critical sentence in the report…..
"under staff's baseline scenario, China's credit intensity is expected to improve from 3.1 (trillions of credit needed to generate 1 trillion of nominal GDP) in 2017 to 2.6 in 2023" – This clear testament to how China is driven almost entirely by credit creation and as external funding costs (read: global central banks) increase cost of funding the pressure will be on for the Chinese model.
In this context today's FT Big Read: Regional Lenders: China's most dangerous banks is another must read
LGFV – Local government funding vehicles
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