Guest Post: Is China's Economy Staring Down The Bottomless Pit

Tyler Durden's picture

Submitted by Zarathustra of Also Sprach Analyst,

All major macro data from China over the last 2 days have been disappointing.

The third quarter started on a surprisingly weak note for China despite all the talks (and hope) on stimulus and monetary policy easing.

The macro data pretty much confirm our view that economic growth did not reach a bottom in the second quarter as the consensus used to believe.

If anything, the economy seems to be worsening somewhat again.


Wrap up of July macro data:

CPI Inflation +1.8% yoy, PPI –2.9% yoy

Industrial production +9.2% yoy

Fixed asset investment +20.4% yoy

Retail sales +13.1% yoy

Exports +1.0% yoy, Imports +4.7% yoy

New loans +RMB540.1 billion

After these weak numbers pointing to hardly any recovery, we believe that the market will step up their talks on further and more aggressive stimulus both on fiscal and monetary sides, and we suspect that the consensus will be shifting from believing in a Q2 bottom to a Q3 bottom (which has been happening for a few quarters now: the economy will recover next quarter, said everyone in every quarter).

There is very little doubt, to our mind, that this series of weak numbers will put more pressure on the government to ease policy further. However, let us review a few facts: the People’s Bank of China has already cut interest rates twice and RRR has been reduced three times since late last year. The government has expressed their intention to bring future investment projects forward, and now that growth is their top priority.

On top of that, local governments have been, in the last few months, announcing massive plans to stabilise growth, and some have suggested banks to lend to local governments for growth stabilisation purpose.

Surely, many of these have not been implemented (especially the local governments stimulus), and we still have no idea just how much of these investment plans will actually come through. However, with the easing that has been done, obviously it is not working yet. This is consistent with our belief that it will require much more stimulus in order to ensure growth can get above 8%. What have actually been implemented (mainly in forms of interest rates and talks of stimulus) were far from what we would regard as “enough”.

The problems that are left now is whether the government is willing to stimulate the economy like crazy (as they did in 2009), and whether the government still has that ability.


Is the government willing to stimulate the economy like crazy?

The answer, unfortunately, seems to be no, not quite.

As we mentioned for a number of times, the fact that the real estate market warming up in the past few months has already caused some concern. While the government is not likely to implement extremely harsh measures to curb home prices at this point as the economic slowdown is getting much worse than most expected, it is not likely that they would like to ease either. As we believe that it is next to impossible to ease policy to stimulate growth while at the same time cool the real estate market, this leaves the government in a position that limit their willingness to implement full-on easing.

The on-going drought in the US is also going to delay more aggressive stimulus and monetary easing. As we noted before, meat prices in China tend to lag global corn prices. With corn prices reaching a record, it will probably put some inflationary pressure on food prices later this year. Although inflation in China on an ex-food basis is low and is expected to remain very low owing to massive over-capacity, food prices account for 30% of China’s CPI basket, and food prices have been historically very volatile in China. Thus while “core-inflation” will be low or negative in medium to long term, inflation in food prices will probably have reached a short-term bottom and is set to rebound somewhat. Although we are not expecting headline inflation to go back to 4.0% yoy all of a sudden within 2 or 3 months, a rebound in food prices will undoubtedly limit the perceived room for policy easing.


Does the government actually have the ability to stimulate the economy like crazy?

Of course, we would accept that the government will be willing to do more when things turn even worse. In fact, this is probably what the market has been expecting for every major central bank: just print more money when things look bad. Thus the more important question to consider is whether the Chinese government and central bank really have the ability.

The consensus invariably believes that China “has a lot of room to stimulate the economy”, “has a lot of tools at its disposal”, etc. This could not be further from the truth.

The latest data actually confirm the point. Loan growth is not really picking up after interest rate cuts, and deposit growth remains weak. Meanwhile, prices pressure continues to subside, with PPI falling 2.9% yoy. This actually fits into our debt deflation call surprisingly well.

Meanwhile, we noted that China has record rather consistent capital outflow since late last year, and this picture has been confirmed in the balance of payments, which showed that China had the first BoP deficit since 1998. As explained in more detail in our guide to China’s monetary policy, central bank creates money to prevent Chinese Yuan from appreciating during the period of inflows and massive trade surplus, thus creating more liquidity in the banking system. The opposite will happen: central bank withdraw money from the foreign exchange market to prop up Chinese Yuan (as they have been doing recently), thus tightening monetary condition. It is true that the central bank can cut reserve requirement ratio (as they have done for a few times) to offset, but cutting RRR is not real easing, and there is only so much the PBOC can cut (i.e. about 20% or so).

In theory, the government can run much higher deficit (and run up larger debt) for the sake of creating growth with a fiat currency. But with a peg like it is now, with smaller trade surplus and capital outflow, that severely limit the central bank’s ability to ease credit. Although government directed lending (i.e. government forcing state-owned banks to lend) is a key tool within China’s monetary policy toolbox, Chinese exchange rate regime (as it currently stands) limit the ability for banks to extend credit when the country is facing shrinking trade surplus and capital outflow, even if the government wants them to.


Staring down the bottomless pit

We hope that the consensus is (finally) right and that we are wrong. We hope that we will not be repeating the joke that “the consensus is expecting a recovery in next quarter during every quarter”.

Unfortunately, we just don’t see that, and we doubt if the government has the willingness at this point to do much more, and we doubt whether the government really has the ability as the market thinks. We do not see convincing signs of recovery (except, perhaps, Wen Jiabao making waves every other week), and we even struggle to see signs of stabilisation.

If we see anything, we are seeing a bottomless pit.

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realtick's picture

Bottomless pit.

Endless pot.

DoChenRollingBearing's picture

Barron's this weekend has as its Cover Story a piece on Chinese brands we "must know" about.  Also reviewed is their column on silver miners, junk bonds, high-frequency trading, cheap (?) German stocks and a note about how the stock market is up five weeks in a row now.  Read all about it:

philipat's picture

I shouldn't worry too much. China has over three Trillion in reserves which could be dumped, sorry I meant re-invested, if necessary. The US should be so lucky?

Michael's picture

With 64 million empty vacant Chinese real estate properties and a housing bubble the size of Jupiter, there is nothing in the known universe that can stop the Chinese housing bubble from popping.

kito's picture

Housing bubble in china? Perhaps you should research what percent of housing makes up their gdp.....most of their 1.4 billion people dont have mortgages....there is no chinese housing bubble......china isnt crashing....wake up mikey......the chinese people are savers....... they dont get medicaid, section 8, obamacare, disability....they dont bum rush walmart for 60 cent towels.....they work hard, they are self reliant.....the country is a creditor are looking at the wrong country for bubbles.....

eaglefalcon's picture

"Chinese people don't pay mortgage"

That statement is grossly incorrect, Chinese people do pay mortgage. Not only that, the typical interest rate is about 6-7% which would be considered subprime in the US. Not only that, to buy a house, you need to pay at least 50% upfront. Not surprisingly, a lot of homebuyers have to borrow money from friends and relatives to make the down payment. Consequently, many young people spend a greater part of their income paying back their loans and interest. It's quite common that a couple makes 10000 yuan a month and 7000 yuan goes straight to the mortgage. Moreover, since they have already spend mom and pop and auntie susan's money on that 50% down payment, there is no way they can walk away from the loan even if the house goes under water. If you wonder what indentured servitude means, this is a perfect example. The Chinese call such people "fang nu" which means "house slave"

LudwigVon's picture

Kito is right about everything else, but wrong about mortgages. Commercial banking is quite well developed throughour China, but high down payments and austere spending keeps bubble-highs in anglo land. Many developers and speculators will lose it all, but the population and economy as a whole are much bigger and buffered from the losses in parts of one sector. 

The larger question to Chinese hard landing is the speed and extent to which they can serve new customers, save and recognize a storm brewing in their top export destinations today.

philipat's picture

And China has 1.5 Billion people, a very small percentage of whom will eventually occupy the housing stock. IMHO it is more productive to build infrastructure than using the same amount of money to bail out Banks.

andrewp111's picture

HaHaHa. China can invade other countries (like Australia) and turn its empty new cities into prisons for foreign displaced populations.

vast-dom's picture

the entire planet is at the rim of this blackhole and they keep telling us we're not yet getting sucked in, that there's hope....hahahaaaa

neptunium's picture

I'm not worried about a Chinese crash, it'll have as many positive long-term impacts for the Chinese and for the rest of the world (Sans BRICS) too - they've defied expecations as every bubble does for just a bit longer than I'd thought possible - major reforms are needed, and the net effect will be to push certain parasitic investment entities past the point of too-big-to-save so it's a win-win for us too - the status quo is unacceptable, once you accept that you'll sacrifice a lot of "economic stability" to get to that point. 

old naughty's picture

Economic destruction, not economic stability...and the point is reached, bottomless pit we are all getting sucked in!

So in fact, bifurcation didn't work, bad planning, TPTB.

billwilson's picture

Is China's Economy Staring Down The Bottomless Pit - YES!


Laundry boy says to May West: "Me come licky split." to which Ms. West replies: "Forget about that, just give me the laundry."

WmMcK's picture

She also said "Any time you've got nothing to do and lots of time to do it come on up".  And was it also her that said something about visiting her between the holidays?

Lore's picture



When did primarily-American analysts begin substituting the word "Stimulus" (usually in a reverent tone of voice) as Newspeak for "tossing bits of paper at things?"  It's primarily a Greenspan boondoggle, yes?

Somebody should explain that tossing scraps of paper is no more stimulative than banging pots and pans. Handouts to insolvent banks merely reward corruption.  You might as well encourage drug addicts to get clean by subsidizing their next fix.

Wherever you hear the word "STIMULUS," substitute "BRIBE" in the interest of clarity.

LudwigVon's picture


BRIBE implies it is their currency that is handed to banks, the PAYMENT is drawn from others who hold the Fed's dollars - in the form of dilution.

Hype Alert's picture

Obviously governments want to be all things to all people.  It's a scary thought that they are willing to sacrifice our future to keep pushing that misconception. 

A Lunatic's picture

Obviously governments want to be all things to all people.


Really............because quite a few of us just want to be left the Hell alone.

EZT's picture

Buy the fucking pit

Monedas's picture

The bottom of my pit is full of hermetically sealed silver !

runlevel's picture

curious as to fiftybaggers thoughts on this.

ArrestBobRubin's picture

ZH has really been pushing this bullshit about China's "impending doom". How fucking laughable. It's sad really that ZH either buys it, or is whoring it. Or both.

Here's another view. Have your kids learn some Chinese folks, as that's where they'll be going for jobs to escape the impending calamity the banksters have waiting for them here.

Silver Update 8/10/12 American Delusion
post turtle saver's picture

My kids don't need to learn Chinese because the Chinese have learned English.

GFKjunior's picture

That is absurd on every level.


If you think the banks are terrible in the US you have never seen or experienced the government-corporation dynamic that exists in china. Bailouts and TARP? Nah just nationalize the banks. When a person thinks of china the one word that should come to mind is KLEPTOCRACY.

LMAOLORI's picture



"When a person thinks of china the one word that should come to mind is KLEPTOCRACY."



Wealthy people are leaving China.  Many of them are kleptocrats, corrupt officals and financial criminals, and some are seeking havens in the U.S. and Canada.   


Now that the country has been looted, the ultra-wealthy are clearing out of China.

in full

China’s Superwealthy Leaving Country


Another word that comes to mind is COMMUNIST irregardless of how bad some people think they have it in the U.S. at least we still have more freedom and protection then the people in China.

otto skorzeny's picture

you mean the same way we should have been "teaching our kids Japanese" in the 80s. how did that work out?

RafterManFMJ's picture

Pretty well. I can speak some Japanese still.

"You come now!"

Sandoz's picture

If knowledge of China's economy could be represented as a spectrum, one end of that spectrum would consist of people who actually know something about China's economy. On the opposite end of that spectrum would be you. 

Kayman's picture

Other than slave labor, what exactly is China's economic strength ?  Their economy is founded on selling cheap shit to the West.

Their main entrepreneurial skills are stealing ideas from other people/countries.

Close Walmart and you close China.

Monedas's picture

I like the "layered look" !      Mayonaise jars inside ammo cans inside paint buckets full of cement and lime !

A Lunatic's picture

You must really like your mayonnaise..............

Zero Debt's picture

How can +20.4% annual growth of anything be described as "weak"? Then what is "strong"? Did the author imagine +30% or +40% laid out on an exponential chart on a 10-year timeline?

The data must be flawed because it is all nominal. If inflation is/was higher than reported (likely) then 10% more yuan does not buy 10% more labor, material etc. Actually, fixed investment in real terms may be flat or declinig. But the "data" does not show this.

otto skorzeny's picture

because Chinese economic #s are about as unmanipulated as the BLS's.

Zero Debt's picture

Undoubtedly these numbers are a total fraud and merely party slogans and propaganda tools.

However an "independent analyst" should know better than to run away with these numbers and pretend any conclusion derived from them constitutes independent thinking.


Poetic injustice's picture

There were some articles, but in your infinite wisdom you passed them. One was based on China energy consumption, which shows completely different picture.

Zero Debt's picture

I'm no wise guy and it's A-OK for them to be a China bear and they do have many angles on their analysis and yes they wrote about power stats and hydro etc before... but again post 20%+ growth figures now and start analysing from there... plain indefensible ....

Further, the trouble is, even power stats are not reliable any more. Just as in Libor, they are not measured, they are "reported".

Jun 23: Power statistics are being reportedly falsified by officials who are being told to report declines as zero change -

July 30: Coal inventories are reaching new highs post-08 crisis, coal prices are falling -


Never One Roach's picture

Don't forget that more then 50% of the Chinese live on less then $1 a day BBC reported. The spin off of China's crash will domino into Australia where the median house  price has Bubbled up over $650,000 and get this...the median income is still less then $65,000 and dropping due to slowing in the 1) construction industry and 2) in the resource sector.


GFKjunior's picture

Yes. Canada is experiencing the exact same thing, their largest lumber purchaser is china.

americanspirit's picture

I have lived in China. Only the top 1% of the top 1% have any cash available to buy anything. The rest of the 99.9% have no cash and no reserves. They live day to day and exist without money - barter is the name of the game. I'm not sure how China has been made into this giant economic machine in the eyes of westerners but I am sure its all a con. Just like QE 1&2&3 - all a con job. The reality is that the vast majority of people in China have never had any money and never will have. The "trade surplus" is all paper - it is worthless. How the meme that China will save the west got started is beyond me. Chinese factories - give me  break! Chinese economic policy - please, stop, you're killing me!  Even if they had the means - make that especially if they had the means - they would never do it. For most Americans the mental image of China is of one large coordinated entity - this could not be more wrong. China is a vast, ungovernable mass of seething humanity. Doesn't anybody remember the laughable "five year plans"? Turn your woks into rebar! Jesus - how much more of this stupidity must we bear.

post turtle saver's picture

China... putting the "con" in "economy"

Lore's picture

Sorry friend, but your perspective seems substantially erronious and/or out of date and/or simply dishonest. 

I have also spent time in China and am going back next week.  Shopping malls in China are jumping. The people are nicely dressed, and spending is evident by all the shopping bags. The feeling there even in cities far from the coast is like America back in the 50s. The optimism is pervasive. And they spend time outdoors with theri children. No tattoos and obese lardguts or nose rings there, TYVM.

Drive in a straight line through downtown Chongqing and the skyscrapers like downtown New York City go on for nearly three hours, These are new, modern cities filled with people who are not working for barter. The incredible scale and modernity of their factories is like nothing I have ever seen in my American travels.  The industrial areas go on and on and on and on. 

I don't know where the "China will save the West" meme got started, because I agree with you: WHY WOULD THEY BOTHER?  They have their own economy and their own people to worry about, and they do productive things with real manufacturing jobs. They don't need to engineer credit bubbles.  The only reason they continue to accumulate U.S. Treasuries IMO is for geostrategic purposes. 

FRBNYrCROOKS's picture

Just wait until the Chinese fuck that ass clown Bernanke by dumping their 1.5 trillion in US Treasury debt for pennies on the dollar. What will those jackass douche bags at the FRBNY do then?