China Unexpectedly Fails To Follow Fed Rate Hike After "Shockingly Weak" Economic Data

It was just yesterday when we noted the sharp collapse in the Chinese credit impulse, when in May, the PBOC reported that Total Social Financing grew at the slowest pace since July 2016, as a result of a full-blown crackdown on China's shadow credit system.

Barely 24 hours later, China served not one but two major surprises that were the direct result of the sharp slowdown in China's credit dynamo.

On Thursday China reported activity data including industrial production, fixed asset investment and retail sales, which missed across the board - in the case of fixed investment the weakest on record - and were the most definite confirmation yet that China’s economy is finally starting to get hurt under the weight of a multi-year crackdown on risky lending that has pushed up borrowing costs for companies and consumers, and has led to a surge in corporate defaults.

The number suggested further weakness ahead if Beijing continues with its crackdowns on pollution, questionable local government spending and off-balance sheet “shadow” financing, which as we reported yesterday tumbled at the fastest monthly pace on record.

The data, which showed the slowest investment growth in over 22 years, “was all shockingly weak by Chinese standards,” according to economists at Rabobank who warned to “get ready for headlines talking about Chinese deleveraging hitting the economy – except it isn’t even deleveraging yet! China is walking more of a tightrope than markets believe – and the data underline that issue clearly."

The numbers in question:

  • Industrial production (IP): +6.8% yoy in May, missing consensus est of +7.0% yoy; and down from April: +7.0% yoy, +6.6% mom annualized.
  • Retail sales: +8.5% yoy in May, missing conesnsus of +9.6% yoy, and down from April: +9.4% yoy, the slowest since June 2003.
  • Fixed asset investment (FAI): +6.1% ytd yoy in May, missing consensus est: +7.0% yoy; and same as April yoy: +6.1%. This was the slowest pace since at least February 1996.

FAI growth slowed mainly on lower infrastructure investment growth

Industrial production growth decelerated in May

As Reuters notes, China has been walking a fine line between rolling out measures to curb financial risks and pollution and tapping the brakes so hard that business activity slows sharply. Much of their effort so far has focused on the banking sector rather than corporate debt reduction or deleveraging - possibly explaining why China’s headline growth has been so surprisingly solid, prompting some such as Morgan Stanley to wonder if Chinese credit impulse has decoupled from the Chinese economy. Now we can confirm it has not as official and unofficial gauges are now showing the regulatory crackdown is starting to filter through to the broader economy, with companies complaining it is harder to get financing and a growing number of firms defaulting on bonds.

China’s fixed-asset investment (FAI) growth cooled to 6.1 percent in January-May from the same period a year earlier, the slowest pace since at least February 1996. Meanwhile, growth in infrastructure spending, a powerful economic driver last year, slowed to 9.4 percent in the first five months, from 12.4 percent in January-April.

“The biggest drag on FAI here is infrastructure investment,” said senior China economist Betty Wang at ANZ.

At the same time, retail sales grew 8.5 percent in May, the slowest since June 2003. The slowdown was due to seasonal factors and consumers delaying purchases, Mao Shengyong, a spokesman at the National Bureau of Statistics, told reporters. Of note: auto sales dipped 1 percent. China’s auto industry said on Monday that some car buyers were holding off on purchases, presumably until import tariffs are cut from July 1.

Worse, one of the brighter spots of China's economy is set to turn dark: while trade was strong May, analysts expect exports may also lose momentum in coming months amid rising trade tensions with the United States. Chinese exporters have been front-loading their shipments due to changes in the international trade environment, commerce ministry spokesman Gao Feng said on Thursday.

A third round of Sino-U.S. trade talks early this month ended with few signs of progress, as Beijing warned that any trade and business deals reached with Washington would be void if it implemented tariffs.

As the WSJ reported, on Friday Washington is expected to release a list of some $50 billion worth of Chinese goods that will be subject to a 25 percent tariff. But it is not clear when U.S. President Donald Trump would activate them, if he chooses to do so.

Realizing which way the economy is headed, shortly before the data was released, China’s central bank sparked concerns over the health of the economy when instead of hiking by 5bps in response to the Fed 25bps rate hike as it has traditionally done, it left short-term interest rates unchanged, surprising markets which had expected it to follow a hike by the Federal Reserve. As Rabobank analysts noted, the "shockingly poor" readings explain the central bank’s decision to keep rates on hold.

Making matters worse, China's recent easing measures appear to have had little positive impact on the economy. Since April we have seen the government cutting RRR, lowering interbank rate, loosening collateral standards for commercial banks when utilizing MLFs and loosening requirements on deposit deviation, stating the desire to support domestic demand and, equally importantly, not emphasizing the importance of deleveraging (instead referring to “controlling” or “stabilizing” leverage). Furthermore, anecdotal news reports indicate some PPP projects are being brought back to construction after being suspended in late 2017/early 2018.

As Goldman notes, up to this point, the policy loosening is primarily due to concerns over the impact of the US-China trade disputes on growth. In our view, other contributing factors may be (1) the perception that growth is not uniformly strong, (2) lower-than-expected CPI inflation, and (3) high profile cases of defaults in fixed income markets.

However, the easing measures thus far have not translated into strong liquidity supply for the real economy. The below expectations May TSF data led to a lot of concerns about policy effectiveness given the continued tight financial regulatory environment. The government does not have perfect control over liquidity supply to the real economy on a real time basis. Given the bias to keep policy loose during the trade dispute and today’s data, Goldman believes that it is likely that the government will take market or/and administrative measures to prevent repeated downward surprises in credit supply and growth.

Or maybe not: as the PBOC announced earlier today, the central bank suddenly finds itself trapped:


In other words, it can't hike over fears of slowing down the economy too far, and it can't ease or else risk another round of capital outflows and a spike in inflation.

The bottom line is that, as Citi showed in the chart below, it is all about central banks and China. And we know that the former are now aggressively tightening, meanwhile the lack of Chinese credit is starting to hurt the local economy. It is only a matter of time before this spills over to the rest of the world.



Giant Meteor Thu, 06/14/2018 - 06:14 Permalink

Only a matter of time before it spills over into the rest of the world.

Only a matter of time until the world of debt implodes over an ill fated illusion that can no longer be maintained.

It was never sustainable .  


Antifaschistische Giant Meteor Thu, 06/14/2018 - 06:56 Permalink

I just returned from China last prior years, when I was there the construction was nothing short of amazing.  The world has seen nothing like it.  Entire residential development projects with 60 high rises all being built at the same.   This time, I was in Guangzhou, but I did not see the same level of 'work in progress' that I have seen in the past 6 years.  I did see many of those high night...with no lights on.   Some of them, 100% dark.  All that to say, the excess capacity in 'residential' style real estate will last a long time.   Well, unless China develops a mandatory 4 child policy.  :)

In reply to by Giant Meteor

Giant Meteor Antifaschistische Thu, 06/14/2018 - 09:20 Permalink

I was never a fan of “a rising tide lifts all boats .” A rising tide does not lift boats with gaping holes in the hull.

The China miracle eh. 

Everyone is impressed with the bling, while failing to understand the mechanics of the miracle. The Chinese learned western lessons well. Handed the necessary plans to the miracle , hide massive debt, malinvestment under the rug, financial alchemy etc. beat the west at their own game!

Now as sales are down they present numbers that would STILL be the envy of USA , but alas , must tighten as all this lying and bullshit just ain’t sustaining the illusion of global capital markets , as the miracle proves not so much a miracle but a global debt bomb looking for a place to land .

So we continue musical chairs hoping for a real honest to goodness miracle.

Maybe there is an app for that ..

In reply to by Antifaschistische

bshirley1968 Giant Meteor Thu, 06/14/2018 - 07:32 Permalink

You know what you do when your 14 yr old son is kicking your ass in a game of chess? You get up and "accidentally " knock over the table and upset the board.

Trump's flailing, the Feds tightening, global economic downturn cover up by the media, and the obvious fact that political and economic matters are spinning out of US control makes me think we are knocking over the table before this ass kicking gets any worse.

The key is the face saving "accidental" part. Got to make it look good. Must be sure blame is focused somewhere else.

In reply to by Giant Meteor

nmewn Thu, 06/14/2018 - 06:58 Permalink

Xi has had himself declared Emperor for Life, Líl Kim has bailed out, Eurabians are given free transportation to their favorite raping & pillaging zones by Frau Merkel who can't even muster one fighter squadron, the DNC is broke and on its third chairman in as many years, Maxine is still muttering about Colt45, Mr.Mifsud is still missing, Seth Rich still dead, Bill Clinton has dementia and Hillary's non-investigation "mattering" is about to be exposed as the farcical miscarriage of justice and coverup it was.

Happy Birthday Don ;-)

Byte Me nmewn Thu, 06/14/2018 - 07:15 Permalink

Plus: never forget that China invented paper money, thereby having an early inkling as to the 'value' of fiat.

I think we're near the summer rioting season. Question is, who throws a wobbly first?

  1. Britain (so many reasons)
  2. France (never wanting to be upstaged)
  3. China (doubtful)
  4. Italy!
  5. Sweden
  6. ..Or a false flag BLM bash in the good old US.

Maybe Brazil gets the head start..

In reply to by nmewn

Money_for_Nothing Thu, 06/14/2018 - 07:12 Permalink

China has a flawed system that punishes its most creative people. This has been overcome for the last 40 years by foreign investment. China could change to be more people friendly. Seems to be going the other direction.

agNau Thu, 06/14/2018 - 08:52 Permalink

The question is how does one gather the population of the world into smaller more densely packed footprint?
Those that plan well prepare the footprint for the population.