The Unbearable 'Factual' Lightness Of The Chinese Economy

Factual data point after factual data point is indicating more than a little stress in the Chinese economy (and the Asian engine of growth in general). Whether it is bank loan losses escalating, shadow-banking stress, real-estate corruption, dismal retail spending, the shrinking textile industry, the artificial production in the crushingly slow metals industry , the construction industry's contraction, or the massive '50%-above-demand' channel-stuffing now occurring in the Chinese auto market, Diapason Commodity's Sean Corrigan succinctly notes: "China bulls will not heed any of this, of course, for they are prisoners of the nested illusion that all increases in outlay represent genuine growth (cf, Occidental property bubbles) and that higher growth must imply greater profitability. They will also argue, on any uptick in the macro numbers, that the worst is not only behind us, but that it has been more than fully priced in." Given a picture paints a thousand words, Asian trade volumes have ended their rebound and are exhausted.



On Chinese real-estate and bank loan losses:

For hardly a day now goes by without some other tale of misplaced investment financial chicanery, or growing commercial distress filling the pages of the local business press.


In real estate, for example, Beijing is said to have become sufficiently alarmed at what the creaking state of developers? finances could mean for bank balance sheets that they have formed a ‘task force’ to investigate the true extent of exposure. Another story is of the deceits practised by credit-hungry developers, whether ?paying? suppliers in apartments, not cash; lending otherwise unqualified buyers the deposit they need to secure a mortgage; or raising false sale documentation with which to provide anxious lenders evidence of cash flow.

On Chinese retail-spending:

the nation?s No.1 home appliances retailer, Suning, just warned of a possible 30% fall in profits, while industry No.2, Gome, saw its shares hit their lowest ever level when it indicated it was actually trading at a loss.

On the textile industry:

The textile industry where Adidas has followed the lead of rival Nike by closing down production. Understandable enough when business leaders in the key province of Zhejiang are to be heard bemoaning the loss of business not just to lower?wage Asian competitors such as Vietnam and Cambodia, but also to Eastern European alternatives such as Romania.

On Metals:

...almost a third of such companies ran at a loss last year. So, production cuts, anyone? Not likely, that?s only something which need be contemplated by capitalist running dogs like Alcoa, Rio, or Rusal! No, instead output hit a new record of 1.7 Mt in June as, according to Yao Xizhi, an analyst at state?backed research firm Antaike, around 500,000 tonnes of idled capacity came back online in May, while the first half as a whole saw a million tonnes added, with another million likely to come on stream in the second half. How can this be? Well, the clue is that several local governments were said to be offering artificially cheap electricity in order to keep the fires burning. Helps with the nation?s Himalayan?scale, 300 million tonne stockpile of coal, one supposes.

On Construction:

Japan’s Komatsu, it is rumoured, saw sales to China halve while Caterpillar suffered a QII fall in regional revenues of 11% in QII... The company announced plans to scale back production, to increase exports (!), and to offer more ?merchandising incentives?. Have bright, yellow, cellophane?wrapped, wheel?loader ? will rehypothecate.

On Shipyards:

Overbuilt enormously in the boom and now facing a 50% slump in orders as global freight rates plunge, taking new?build prices to an 8?year low on an index compiled by shipbrokers Clarkson. Qinhuangdao Port on China?s northern coast – ‘seen as a barometer of the economy’ – has seen daily throughput drop from ‘at least 50 vessels per day’ to ‘only one?quarter of that capacity’ so far this month.

On Vehicle Sales (and channel stuffing):

More ominously yet, for a nation still supposedly ploughing its way resolutely through the softest of soft landings, commercial vehicle sales slid 10.4% in the first semester, compared to the same period in 2011.

...passenger car ‘sales’ rebounded smartly in June – possibly in a rush to beat the looming registration restrictions shortly to be imposed in several major cities – though even this only took the overall YOY tally for the first half up to an anaemic 2.9% increase, but the problem is that a ‘sale’ in China means the maker has delivered the car to a dealer, not to a satisfied customer who will soon be proudly driving off the lot in his gleaming new roadster.

?There is overcapacity in the automotive industry. We will most likely see some consolidation,? said James Chao, Asia?Pacific director with IHS Automotive Consulting, in what sounds like an heroic understatement of the case.

As the China Daily noted, against a hoped for 20 million sales this year, it is estimated that the planned auto capacity of China?s 12 major automakers will soon surpass 30 million units, thus exceeding market demand by a cool 50%


It is not to be overlooked that the Chinese authorities are still giving off signals that they will not repeat the indiscriminate orgy of spending which was unleashed at their behest in 2009?10. Indeed, the very same day that President Hu noisily categorised the employment situation as ?complicated and grim? (his own included, one might add), the usual party organs were rehearsing front?page arguments against another mass infusion of credit, while positing the view that some ?friction? was an unavoidable concomitant of the nation?s necessary rebalancing.


Attacking the problem from another angle, we might wonder how – if things have gone as far as they seem to have done – even an authoritarian regime can drive sufficient temporarily?productive credit outside the coterie of its biddable, capital?destructive, princeling?packed, SOEs and into the hands of owners and managers of less coddled enterprises which are already struggling with chronic over?capacity, elevated costs, and, consequently, vanishing returns.


Source: Diapason Commodities