In retrospect, when last Sunday we wrote that "China's Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade [11]" in which we showed that not only had China's shadow banking credit creation stopped outright, but had - due to a decline in Banker Acceptances and Trust Loans - shifted in reverse for the past 4 months...
[12]
... it should have become clear that it was only a matter of time for the PBOC to step in and provide additional "higher-quality" liquidity, as it just did on Friday morning when it cut rates for the first time since 2012, sending the US market to all time highs.
And yet many questions remain: will the PBOC be able to "shotgun" its way in stimulating an economy that has deceleration written all over it. Remember: for all the talk of massive outside money injection in the global system by QE at this central bank or that, the total assets of the Big 4 central banks have grown far less than what just China's bank assets have risen by over the same period, something we showed a year ago in "How In Five Short Years, China Humiliated The World's Central Banks [13]" (the chart was as of Q3 2013).
[14]
In other words, for all the talk about the Fed, the BOJ, the ECB, the real attention should have been on China, and its fungible credit growth, all long.
So when stripped of the Politburo propaganda, and economic stats that are now only more credible than those released by the US Bureau of Labor Statistics, what is really going on in China?
For one answer we go to the final dispatch by the WSJ's Bob Davis [15], who has just concluded his four-year assignment covering China and has allowed himself some essayistic freedom with his parting words.
He writes that "during my time in Beijing as a Journal reporter covering China’s economy, starting in 2011, China became the world’s No. 1 trader, surpassing the U.S., and the world’s No. 2 economy, topping Japan. Economists say it is just a matter of time until China’s GDP becomes the world’s largest." Alas, "my own reporting suggests that we are witnessing the end of the Chinese economic miracle. We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok."
[16]
Davis leaves the country less than optimstic about its economic prospects:
"So why, on leaving China at the end of a nearly four-year assignment, am I pessimistic about the country’s economic future? When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years—a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast."
Ironically, it is the US and Europe that have adopted much of the same "loose excel data" policies that had made China the butt of all economic goalseek jokes in the past decade: how long before the US is also forced to admit its own "growth spurt" is also built on quicksand?
But back to the Middle Kingdom: here are some of Davis' reasons why China, which served as the global debt-fueled dynamo during the post-Lehman collapse when the rest of the developed world tumbled into depression, and managed to grow while everyone else was flailing, is set to become the biggest deadweight to the entire developed, and developing, world:
- Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors. I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales.
- From my hotel window in the northeastern Chinese city of Yingkou, for example, I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.
- Debt paid for the boom, including borrowing by governments, developers and all manner of industries. This summer, the International Monetary Fund noted that over the past 50 years, only four countries have experienced as rapid a buildup of debt as China during the past five years. All four—Brazil, Ireland, Spain and Sweden—faced banking crises within three years of their supercharged credit growth.
- China followed Japan and South Korea in using exports to pull itself out of poverty. But China’s immense scale has now become a limitation. As the world’s largest exporter, how much more growth can it count on from trade with the U.S. and especially Europe? Shift the economy toward innovation? That is the mantra of every advanced economy, but China’s rivals have a big advantage: Their societies encourage free thought and idiosyncratic beliefs.
- Even powerful Chinese leaders have trouble enforcing their will. I reported earlier this year on the government’s plan to handle one straightforward problem: reducing excess steel production in Hebei, the province that surrounds Beijing. Hebei alone produces twice as much crude steel as the U.S., but China no longer needs so much steel, to say nothing of the emissions that darken the skies over Beijing. Mr. Xi weighed in by warning local officials that they would no longer be judged simply on increasing GDP; meeting environmental goals would count too.
- In late 2013, Hebei staged an event called “Operation Sunday.” Officials sent demolition squads to destroy blast furnaces, and imploding mills made great TV on the 7 p.m. news. But it turned out that the destroyed mills had long been out of production, so blowing them up didn’t affect output. Indeed, China’s steel industry is on track for record production this year.
And the punchline:
- The situation has become so bad... that a middle-aged investor, fearing that a local developer wouldn’t be able to make his promised interest payments, threatened to commit suicide in dramatic fashion last summer. After hearing similar stories of desperation, city officials reminded residents that it is illegal to jump off the tops of buildings...
In other words, the Chinese growth miracle may be over, but please don't kill yourselves.
The market may have been quick to cheer the action of the Chinese central bank, but China has a very long and painful climb ahead of it: one where it will be America's turn to prop up global growth when the next global depression hits. One can only hope the US is up to it... and that this winter it doesn't snow too much and subtract $100 billion from US "trendline growth."
