As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency. Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.
They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.
Weakness in PMIs, Exports, and Foreign Investments Are Emerging
Weakness Has Emerged In The Property Market
And The Chinese Financing System And Construction Industry Links Have Become Increasingly Complex
But Do Not Expect Another Large Infrastructure Stimulus Plan
Conclusion – The situation in China is worrying to say the least. Short-term indicators are weakening as past monetary tightening starts to bite and the export model is threatened once again by the risk of recession in Europe and the US. Data from the real estate industry show a significant deterioration, with a clear break in the confidence that real estate prices always go up. The debt burden of local governments and large ongoing deficits should prevent a large stimulus plan similar to that of 2008. Monetary easing could bring some relief, although we believe that Beijing lost some control of the financing system through the shadow banking.
So (Theme #1) Rebalancing Is Key - The Only Way Forward
And China Is Slowly Heading Towards Mass Consumption (Which Changes Commodity Demands)
Mining - The Hardest Hit
But There Are Three Other Long-Term Themes Driving/Stalling China's Growth
Theme #2: Aging Population and Healthcare Needs
Theme #3: Wage Inflation and Automation
Theme #4: Pollution and Energy Efficiency
And In Summary, The Global Industries Most At Risk (and likely to Benefit) From These Competitive Changes