Tuesday, September 15, 2015

The Great Stall of China (excerpt)

China has developed a serious capital outflow problem which has developed and gotten progressively worse over the past year. It most likely reflects the significant slowdown in the country’s exports growth, reducing the incentives for foreigners to invest in Chinese manufacturing capacity. In addition, the end of the property boom in China, combined with the anti-corruption campaign, may be causing more Chinese to invest abroad. Let’s have a look at the most recent data:

(1) Exports & imports. Merchandise exports have stalled around $2.3 trillion (saar) since early 2013). Imports also stalled starting in early 2013 and turned weaker this year.

(2) PPI, profits, & output. The trade surplus (in dollars) has widened to a record high because imports have been weaker than exports. However, both suggest that foreign investors are finding fewer good opportunities in China, especially since there has been a glut of manufacturing capacity, as evidenced by the 42 consecutive months of declines in the PPI. This pervasive deflation suggests that profits are hard to come by in China, which explains why the growth rate in industrial production has plunged from a record high of 20.7% y/y during February 2010 to only 6.2% during August.

(3) Retail sales & stock prices. Inflation-adjusted retail sales rose 8.8% y/y during August. The days of double-digit growth seem to be over. The recent boom and bust in the stock market probably didn’t directly impact very many Chinese, but it can’t be good for consumer confidence.

(4) Social financing. Over the past 12 months through August, China’s bank loans are up 15.7% (Fig. 13). A year ago, when the Chinese government was hoping to make the economy less dependent on debt, this growth rate was 13.3%. Over the same period, total social financing, which includes bank loans, rose $2.5 trillion.

China’s economy seems to getting a lot less bang per yuan for all this debt partly because of the worsening of its international capital account.

Today's Morning Briefing: China: Warning Label. (1) International reserves data: Use with caution. (2) Soaring dollar depressing dollar value of international reserves, exports, and lots of other global indicators. (3) Practice what you preach. (4) Capital flow proxy for China, adjusted for strong dollar, still showing big net outflows. (5) The Great Stall of China. (6) China’s exports have lost their mojo. (7) Foreigners see less reason to invest in China, while Chinese see more opportunities abroad. (8) China is getting much less bang per yuan of social financing as a result of capital outflows. (More for subscribers.)

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