Amid constant liquidity additions, record credit support, a devaluing currency, and admission that the last three years of macro data was fabricated; China ended 2016 with the worst economic growth since 1990...
China's macro data avalanche was a mixed bag. The headline GDP grew more than expected (+6.8% YoY) but Industrial Production disappointed and while retail sales rose more than expected, fixed asset investment growth missed.
If debt is growth then China's transmission mechanism is officially FUBAR as Q4 saw the largest surge in aggregate financing ever...
Credit expansion at close to twice the pace of GDP growth will be tough to sustain without putting financial stability at risk.
And a massive devaluation occurred in the yuan during Q4... (along with soaring bond yields and rising default risk)
And the result of all that...
- GDP (4Q): +6.8% BEAT +6.7% Exp
- Industrial Production (Dec.): +6.0% MISS +6.1% Exp
- Retail Sales (Dec.): +10.9% BEAT +10.7% Exp
- Fixed Assets Investments (YTD): +8.1% MISS +8.3% Exp
As Bloomberg notes,
"Stable growth has come at the expense of higher leverage and bubbles from bonds to bitcoin. A policy shift toward controlling financial risks and curbing housing prices will weigh on the economy in 2017."
On a long-term horizon, the economy seems to be filled by ever-growing debt rather than investment or consumption.
"GDP beat market expectations. Mind you, China’s growth remains supported by massive government spending and record-setting bank lending which in itself continues to fuel asset bubble fears."
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As a reminder, Bloomberg notes that a shrinking working-age population, reduced scope for additions to the capital stock and diminished space for productivity gains mean that China's potential growth is slowing. Bloomberg Intelligence estimates potential growth at 7.1% in 2016, down from 7.3% in 2015 and on a path to 6.5% by the end of the decade.
As Enda Curran, Bloomberg's Chief Asia Economics Correspondent, concludes...
Of course, there is a cost to propping up GDP like this. And that's debt.
It's hard to look past the headline number without considering the gargantuan lending China's banks were forced to pump into the economy to keep things chugging along. We know that policy makers are aware of this risk given the recent signals about prudent monetary policy and a tolerance for slower growth.
The initial fallout was a drop in the offshore Yuan rate (following Yuan strength going into the numbers thanks to Yellen's dovish comments)...