China Hits A Brick Wall: For First Time Ever, Record Chinese Credit Creation Fails To Stimulate Economy

Tyler Durden's picture

Submitted by Gordon Johnson of Axiom Capital

We believe that exhibit 1 says a lot: it shows that despite a record level of new credit issued by China’s PBoC YTD through Oct. 2017 (which stands in stark contrast to government authorities continued statements that China is de-levering), China’s economic backdrop is currently experiencing:

  • (a) monthly construction new start (commercial + residential + office) growth slowing Y/Y (Ex. 2),
  • (b) monthly fixed asset investment growth slowing Y/Y (Ex. 9),
  • (c) monthly cement output slowing Y/Y (Ex. 5),
  • (d) monthly electricity production slowing Y/Y (Ex. 6),
  • (e) monthly M2 money supply growth slowing Y/Y (Ex. 7),
  • (f) monthly household loan growth slowing Y/Y (Ex. 8),
  • (g) monthly private fixed asset investment growth slowing Y/Y (Ex. 10), and
  • (h) monthly home price growth slowing Y/Y (Ex. 12) – in fact, select data points have turned negative Y/Y.

Stated differently, while the lion’s share of our client base continues to tell us, with respect to our bearish views on China… “President Xi Jinping will simply stimulate more if/when things get bad”, we would highlight, again as detailed in Ex. 1 below, China stimulated at a record pace in 2017, yet it did not resonate in improved economic activity (in fact, the exact opposite appears to be unfolding – i.e., economic growth is slowing across a number of data points).

Furthermore, underpinning our view that China’s debt stimulus was targeted specifically at the months preceding the 19th Party Congress in Oct. 2017 (i.e., when President Xi Jinping consolidated power to become the strongest Chinese leader since Mao Zedong), implying we may see a phase of debt fatigue, we note that in the first 10 months of 2016, incremental credit issued in China on a month-over-month (“M/M”) basis was negative three times (i.e., May, July, and Oct.), and averaged $189 billion on a monthly basis; yet, in the first 10 months of 2017, incremental credit issued on a M/M basis was positive in each month outside of Oct., and averaged $429 billion on a monthly basis (in Oct. 2017, the month the 19th Party Congress concluded, new credit issued fell by $11.9 billion M/M).

WHAT DOES IT ALL MEAN? The broader point is… when you issue an unprecedented amount of credit targeted at a growing number of negative ROI projects multiple decades, at some point the law of diminishing marginal returns sets in (since 1/1/09, China’s credit has grown by CNY153.9 trillion while GDP has grown by a much more modest CNY 48.5 trillion, or a multiple of 3.17x, meaning a lot of bad investments have stacked up over the years) – keep in mind that China’s $3.6 trillion in credit issued in 2017 YTD through Oct. is more than the entire developed world combined. Put in the simplest of terms, at some point the incremental dollar in new credit created actually does more harm than good.

Ex. 1: China New Credit Created YTD Through Oct.


Note: Credit created = TSF + Local Gov't Debt.
Source: PBoC; NBS; ChinaBond.

SO WHERE FROM HERE? When considering China hit the afterburners on new credit issuance in 2017, yet the impact seems to be quickly fading, it would appear we may have reached the point of “no return” (while Consensus, at this point, seems completely oblivious to this possibility, the recent sell-off across the Chinese stock markets suggest investors on-the-ground in China may be catching on).

CONCLUSION: In the face of China’s TTM 3Q17 credit as a percentage of GDP coming in at 250%, to “keep the party going”, Xi Jinping would have to force new credit issuance far in excess of $4.0 trillion in 2018 (which could trigger a number of ratings downgrades, as well as a reassessment by the IMF of China’s “market economy” status).

Moreover, given what we’ve seen this year – i.e., 101.7% Y/Y new credit issuance growth YTD through Oct. 2017it seems the level of credit necessary to stimulate growth in China could prove elusive at this point (we don’t recall any economist’s forecasts exiting 2016 pointing to China’s new credit issuance more than doubling Y/Y in 2017, yet that’s exactly what’s happened – had this been our base case, we would have expected all economic indicators in China to be moving substantially higher at this point in the cycle). Thus, to the thesis that rests on a view that: “Xi will just stimulate more”, we would argue that the extent of the stimulus necessary may be so high at this point that President Xi Jinping may have lost sight of how much debt he needs to “get things going again”. Should this prove to be the case, China’s economy will continue slowing, putting pressure on bulk commodity prices, and, ultimately, industrial/steel stocks (CAT, URI, FMG, RIO, X, CLF, GATX, and TRN, all of which we have SELL ratings on).

HOW’S THE DATA LOOK IN THE FACE OF CHINA’S RECORD 2017 CREDIT “BINGE”? So how do the data points look? Well, here’s a few (we feel the charts say it all)…

Ex. 2: Monthly Construction Starts (Residential + Commercial + Office)

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 3: GDP Growth Internals - China (FAI, Industrial Production, & Retail Sales)

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 4: China Monthly Steel Production by Year

Source: World Steel Association (WSA), National Bureau of Statistics (NBS), Axiom Capital Research.

Ex. 5: China Cement Output

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 6: Y/Y Growth in Electricity Production by Month

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 7: China M2 Money Growth, Y/Y% - Multi Decade Low (bearish)

Source: Peoples' Bank of China (PBOC), Axiom Capital Research.

Ex. 8: 3MMA Household Loan Growth, Y/Y%

Source: Axiom Capital Research, Bloomberg, National Bureau of Statistics.

Ex. 9: Monthly Total Fixed Asset Investment and Y/Y Growth

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 10: Monthly Private Fixed Asset Investment and Y/Y Growth

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 11: Private Investment in Industrial Sector and Y/Y Growth

Source: National Bureau of Statistics, Axiom Capital Research.

Ex. 12: Average Price Change of New Residential Buildings, by Tiered-Cities, %Y/Y

Source: National Bureau of Statistics (NBS), Axiom Capital Research.

In short, we feel China could be the “black swan” that ruins the stock market rally party for many in the industrials space. Caveat emptor.

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LetThemEatRand's picture

I just realized that I've read as many stories about China being done as I've stories about Bitcoin being done.  Hmmm.

greenskeeper carl's picture

I don't think either of them are 'done' but this could end up helping bitcoin if wealthy chinese use it to move money out of the country if they sense things are going bad. But, they will just end up doing what central planners always do - moar and moar of the same. It works for a little while. How long is anyones guess.  I certainly have no idea.

SoDamnMad's picture

This is like developing a new weapons system and then some friend of an insider posts all the capabilities and limitations and timing of the system right out there for everyone including the spies to see.  Since the Chinese lie up and down the chain all the way to the top, they breathlessly tell all above that everythign is fine.  Now those who get ZH translated into Chinese will say, "Howey Fuk", we got big problems and have to do something.  Coulda just said, "Yeah, evythign is just getting better".

RationalExuberance's picture

Therefore, these are equivalent. 

zzzz88's picture

all central banks will be forced to eat their own shit someday. 

it seems the day is closer and closer

Bobzilla. Do not piss him off's picture

I'd say, 'you mean just like dogs?' Except, that'd be an insult to dogs everywhere, eceprt Hitlery and Debbie wasserman-Shitz!

Dragon HAwk's picture

Lets all print a bunch of money and invest it with each other we will all be rich I tell you.

Nobody will have to Work or Do anything...

divingengineer's picture

Why not, that’s what the gooks are doing.

Bobzilla. Do not piss him off's picture

Trees don't grow to the sky forever. China srowing down, round eyes.

ebworthen's picture

More noodles! 

Two chickens in every pot!

Wilcox1's picture

I'd hafta kinda agree, Dey's supply push 'bout come to an end.

83_vf_1100_c's picture

Us muricans are broke. Not buying as much Chinese plastic crap.

MuffDiver69's picture

“WHAT DOES IT ALL MEAN? The broader point is… when you issue an unprecedented amount of credit targeted at a growing number of negative ROI projects multiple decades, at some point the law of diminishing marginal returns sets in (since 1/1/09, China’s credit has grown by CNY153.9 trillion while GDP has grown by a much more modest CNY 48.5 trillion, or a multiple of 3.17x, meaning a lot of bad investments “

‘‘Twas but a dream after all...We are in deep deep do do....but these folks make Madoff look like a street hustler...

divingengineer's picture

Cry me a yellow river.

Amphius1's picture

So debt addiction comes with consequences. Who would have known? Could someone please tell the Fed.

MrNoItAll's picture

The law of diminishing returns. We reach a point eventually where no matter how many trillion$ in new digital "money" gets created, it all ends up draining down the same stinking rat holes. All that "money" stopped going into productive uses long ago. Instead, it powers inefficiency, it breeds corruption, it lays waste to natural resources on an epic scale, it makes a mockery out of what used to be free enterprise, it destroys prudence, it creates a BIG LIE that greed desperately clings to. China isn't the only one hitting that brick wall of diminishing returns. It is happening on a global scale, in nearly all major categories. Enjoy the surreal calm while it lasts because what comes after all the lies, debt, manipulation and propaganda have exhausted themselves on the law of diminishing returns will likely get very ugly. There will be a reckoning.

Let it Go's picture

Unlike events that happen in Las Vegas that has prompted the saying, "anything that happens in Vegas stays in Vegas" things that happen in China do not stay in China. This is obvious from the huge amount of wealth fleeing the country over the last few years. The same can be said of Japan. The money flowing across porous borders can be seen in soaring house prices in Vancouver and most of Australia. More about this subject in the article below.

 http://China,China, China, Its All About China And Japan.html

wonger's picture

Makes me laugh when China is accused of lying about its economy, pot kettle lol

AlbertthePudding's picture

Maybe fear of a new cultural revolution under an increasingly authoritarian leadership is behind it.