Beijing, You Have A Big Problem - In Ten Charts

Back in September, when we observed that the "Chinese Commodity Crash Continues", we remarked that a full-blown deflationary episode is upon China as manifested by tumbling commodity prices  (because with fixed investment accounting for well over 50% of Chinese GDP, the marginal price of the commodities that are used in capital investment tell us all we need to know about the true state of the Chinese economy), which would likely lead to a ripple effect on not only the prices of China's most demanded commodities, but on every hard asset around the globe.

With oil plunging roughly 50% since then, this modest forecast, which was obvious to anyone who didn't have voluntary blinders before their eyes, has now come true.

So where is China now?

Well, as we showed last Friday merely when looking at the recent dramatic capital outflows out of China driven to a great extend by the relentless surge in the dollar, a "QE In China Now Appears Inevitable." But it is not just rate differentials and capital flows that confirm that China's economy may be headed for a mini (in the words of Deutsche Bank) or a full blown hard-landing.

One thing that is far more disturbing than China's inability to create shadow debt at its historic pace (as a result of an unprecedented accumulation in non-performing loans) which to many is the primary culprit for the ongoing deterioration in China's outright economic growth, goalseeked as it may be by the Beijing politburo, was a statement by the Minister of Human Resources and Social Security Yin Weimin, reported by China Radio International, which paints a more dire picture for the world's largest (?) economy.

From CRI:

A top official says the Chinese government's employment goals will be difficult to meet because of the country's economic slowdown. Yin Weimin is the Minister of Human Resources and Social Security.

 

"I think we need to work hard to achieve the target of creating over 10 million jobs, as cited in Premier Li Keqiang's government work report. About 15 million young students need to find jobs this year. Half of them are college graduates, and the rest are those graduating from vocational, technical, or middle schools, as well as surplus labor force in the rural areas seeking employment in towns and cities."

 

The minister has also stated that the government will gradually raise the official retirement age, which is as low as 50 for some female workers, but stressed that any policy changes will be phased in over five years. As for China's state pension, Yin says finances are not dire, for the moment, but warned about challenges ahead.

 

"The pension fund faces tremendous pressure in terms of breaking even in the future. The balance not only involves some system factors like salary level but also factors beyond the system. For example, the aging population, urbanization, and economic development. And aging has a huge influence on the fund balance." By 2050, the number of Chinese over the age of 60 will rise to 39 percent of the population, from 15 percent now.

This is about as close to gloom and doom that China will ever come.

But one doesn't even have to dig hard to find proof just how bad the situation in China has become now that the credit creation machinery is sputtering and the government has to come outright and deny rumors of QE:

  • CHINA MOF OFFICIAL SAYS NO SUCH THING AS CHINA QE: SEC. JOURNAL

We'll see about that in 6-12 months, but for now here is a quick and dirty visual summary why Beijing, you now have a very big problem:

First, the one everyone knows about: GDP.

Of course, GDP in China is whatever the Beijing politicians say it is (very much like in the US), so we dig deeper.

First, Consumer Sentiment:

 

 

Perhaps driven by, or resulting in, a collapse in retail sales:

 

... as well as stagnant and declining auto sales (watch out GM).

 

But it's not just the consumer though. The very heart of China's capital intensive economy - fixed asset investment - is now in V-Fib.

 

The chart above explains why demand for global commodities will continue to decline for the foreseeable future. The chart below, on the other hand, confirms Yin Weimin worries about a labor slow down: with Industrial Production slowing, there will be far less end-demand for manufacturing production and labor.

 

And all this leading us to the most important chart of all: home prices in China, which are crashing...

 

... at a pace faster than in what happened to US housing in the immediate aftermath of the Lehman collapse!

And the reason why this is such a problem for China is that unlike the US where the bulk of household wealth is in financial assets (i.e., the market), in China it is the reverse: nearly three quarters of all household assets are in real estate: real estate which is deflating, if not crashing, at an unprecedented pace.

 

Finally, here is a chart which leaves even us speechless. If indeed Chinese rail freight is indicative of underlying economic trends, then the hard landing is already here.