China's economy is starting to show its true colors again
- The most recent economic data out of China came in weak across the board.
- It shows the economy is still in a precarious situation, saddled with debt and at the mercy of credit.
- There have been signs this has been the case all year - despite the country's relative stability.
The Chinese economy is starting show its true colors again. The latest data indicated a slowdown almost across the board, and economists suspect this is just the beginning.
Here are the stats:
- Fixed asset investment (FAI) growth dropped again to an all-time low of 3.9% from 6.1% in April.
- Infrastructure investment slowed from 11.3% to 2.3%.
- Retail-sales growth registered the slowest pace in over 15 years, with car sales being the main drag as volume growth fell to 7.9% from 11.2%.
- Export growth in CNY terms moderated to 3.2% in May from 3.7% in April.
"We have been waiting to see a notable slowdown in the Chinese economy, and it is finally here," wrote Societe Generale's Wei Yao in a note to clients after the data drop.
"The impact of the deleveraging policy is very clear. The final window for the PBoC to adjust its OMO [Open Market Operations] rates - for whatever reason - is probably closed, and a gradual shift towards more accommodative liquidity conditions should take place. Further RRR cuts will be inevitable, in our view."
In other words, money will have to get easier in China again, and that's how we know things are only going to get more dangerous.
The country's economy has been so stable since the beginning of 2018 that it's been easy to forget that it's going through a delicate transition. China's massive state-owned enterprises (SOE's) and its financial sector are still drowning in debt, and newer companies and industries have yet to pick up the slack. Domestic consumption isn't strong enough to carry the country's economy yet either. That's why the government tightened credit conditions in the first place - to ween corporates off debt and reduce the risk of a financial sector collapse.
But the risk is still there, especially if conditions must be eased.
If you listen to the rhetoric about China's rise from leaders around the world - especially in the US - you'd think that it's an unstoppable economic juggernaut coming to take over the globe in a matter of years.
Data like this is a sobering reminder that China's government is facing an uphill battle on the way to true economic domination.
Any color you like
Despite the relative stability of the last six months, there have been other reminders of China's economic fragility. They just don't get the market's attention like an economic-data nose dive does.
I'll give you some examples. There was DunAn Group, a private manufacturer that, last month, sent a letter to the Chinese government begging for help with its $7 billion of debt. It blamed its situation on tightened credit conditions.
It's not the only company suffering. Most recently, a subsidiary of one of China's state-owned travel companies, China Youth Travel Service, failed to pay an $85 million loan after a one-month grace period. The parent has agreed to help it make its next payment according to reports, but what about the one after that?
And after that?
"Tighter financial conditions amid a cleanup in shadow banking activities have led to an increase in the credit risk premium and a steepening in credit curves for Chinese corporates," Morgan Stanley analysts wrote in a recent note to clients. The analysts went on to say they saw limited upside for investors with Chinese companies, though defaults might be mitigated by easing credit conditions and a solid economy.
Then there's China's vaunted One Belt One Road program. China, in a show of soft power, is doing deals to build infrastructure projects in countries around the world. Never mind that it is, at times, building railroads where oceans work faster or that it is sinking money into projects that simply aren't profitable.
Take Ethiopia for example, where China invested around $13 billion between 2006 and 2015. It is now stepping back from those projects, like freight and rail services, where capacity simply never met expectations.
"The Chinese have said they've reached their limit," one diplomat in Addis Ababa told the Finance Times. "'We're way overextended here,' they told us openly."
Most of the time, everywhere in global finance, you run out of money before you run out time.