"Gloom" Returns To China's Economy: Industrial Production, Retail Sales Miss Lowest Estimates
03/12/2016
After an unprecedented surge in Chinese attempts to stimulate the economy in late 2015, mostly on the fiscal side, coupled with recent monetary easing by the PBOC which cut the banks' reserve ratio recently and unleashed a tsunami of new loan creation in January, many expected that this unprecedented credit impulse would translate into at least a modest rebound for the economy, prompting a stable pick up in spending for the economy which many are touting is now consumer-spending driven as opposed to export and production.
However, that did not happen: according to data released overnight by the National Bureau of Statistics, Chinese factories and retailers not only missed expectations, but slowed down materially from the December prints, as anemic demand and excess capacity continued to bear down on the world’s second-largest economy.
Specifically, Jan-Feb factory output grew just 5.4% in January and February from a year earlier, data released by the National Bureau of Statistics (NBS) showed, slowing from a 5.9% rise in December to the weakest since November 2008; the print matched the lowest Wall Street estimate.
Meanwhile, retail sales rose 10.2% over the two-month period from a year ago, below the lowest Wall Street estimate of 10.5%, and far below the December’s 11.1% increase, pushing the trend growth in this series to lows not seen since early 2015.
"Overall, the picture is still quite gloomy," said Commerzbank AG economist Zhou Hao. “Normally, because of Chinese New Year, there’s a big drop and a big jump. This year there’s only a big drop.”
The retail data was particularly disappointing because as the WSJ writes "while industries have been battered by the economic slowdown, retail sales have been relatively buoyant, so the downtick surprised some economists, especially since it occurred around the Lunar New Year holiday when consumption is usually strong."
And to think record, if fake, box office numbers were supposed to carry China's economy in the aftermath of the absolutely disastrous trade data released earlier in the month.
To be sure, the commentary immediately explained that the weak data will mean even more stimulus, even though it was just last week when the Congress laid out all the measures that China will adopt to assure "GDP growth" of 6.5%-7.0%.
Here's Reuters: "China's activity data remained weak in the first two months of 2016, with factory output growth hitting the weakest since the global financial crisis, keeping pressure on policymakers to do more to avert a sharper showdown in the world's second-largest economy."
Unlike the recent collapse in Chinese exports and imports, the overnight data could not be "explained away" due to calendar effects as it combines the January and February timeframe: China's government combines some economic data for January and February to minimize distortions tied to the Lunar New Year holiday, which falls during those two months. It was in early February this year.
It wasn't all bad news: one area that did pick up was investment in factories, buildings and other fixed assets, which increased a faster-than-expected at 10.2?% year-over-year in January and February, compared with a 10% increase for all of 2015. However, economists said that boost came largely from government spending on infrastructure and from investment in parts of the overbuilt property market.
In other words, China is adding even more excess capacity to an economy already drowning in excess capacity.
Ultimately, the problem for China remains: weak demand at home and abroad is weighing on industries and many factories continue to churn out unneeded goods. "A recovery is still eluding China’s industrial sector,” Mizuho Securities Asia Ltd. said in a recent report, before the release of the data Saturday.
Worse, for all the talk about a massive stimulus, China's economy continues to deteriorate: as quoted by the WSJ, Chen Zhenxing, sales manager with Zhejiang Lanxi Shanye Machinery Co., which produces hand carts and other logistics equipment in the eastern city of Jinhua, said his company faces ongoing problems raising capital and boosting prices: "competition is cutthroat,” he said. “Too many companies make products that are pretty much the same, so the focus turns to lowering prices."
Ultimately many will have to go out of business, leading to millions in layoffs, and forcing the Beijing politburo to face its greatest nightmare.
The problem with China's economy is that the local population, having tired of the stock market bubble, has now shifted its attention back to reflating the housing bubble, where as we reported recently there has been an unprecedented 50% surge in some Tier 1 cities such as Shenzen. As such the economy is focused not on creating new goods and services, but merely facilitating financialization and extracting rents.
This is why China's leaders have now put all their eggs in the housing market basket: Zhang Yiping, an economist with China Merchants Securities, said property investment and domestic consumption could be China’s major growth drivers this year given sluggish global demand and Beijing’s plans to cut industrial overcapacity.
Commerzbank’s Mr. Zhou and other economists expressed concern that investment is flowing into a few real-estate markets that show signs of overheating, rather than into new ventures. “Monetary policy is relaxed, but it’s reluctant to go to the real economy, only to property assets,” he said.
The slower pace of retail sales in January and February may reflect the turbulent financial markets and weak corporate profits last year, which dampened wage hikes and bonuses, economists said.
Even accounting for data volatility around the Lunar New Year holiday, China’s economy is off to a slow start this year following economic growth in 2015 of 6.9%, the slowest pace in 25 years. A host of stimulus measures late last year and into 2016—most recently a 0.5 percentage point cut in bank reserves late last month, have yet to reverse the slide in momentum.
The biggest problem, one which we have warned about since 2010, is that China remains mired under an unprecedented debt load, one which makes any forecast for 6.5% growth on the back of credit which is growing at double this pace, laughable.
