If there’s one thing global investors have come to expect over recent years, it’s China’s ability to generate unbelievable rates of economic growth.
Like clockwork, economic growth in the March quarter increased by 6.7% compared to a year earlier, smack in line with forecasts and continuing a trend seen in the previous five GDP reports – in which the figure either met or exceeded expectations by 0.1%.
This regularity is an irregularity in itself, ensuring widespread scepticism from many in financial markets, particularly as it takes just 15 days to generate the figure.
Whether you believe the validity of the government’s growth figures or not, the more overarching question many investors have is whether China will live up to its reputation as the global growth driver in the decades to come.
For every China bull out there, there now seems to be a bear — a complete about-face from only a few years ago when almost everyone was singing China’s economic credentials.
To Roy Smith, an academic at New York University, the breakneck growth seen in recent decades may be nearing its end, suggesting that he sees parallels with Japan’s build-up of bad loans in the late 1980s, which ended up hobbling the once high-flying economy.
“China has now arrived at an existential moment after nearly 40 years of extraordinary economic progress,” said Smith in an interview with Bloomberg.
“China has followed Japan’s economic development model, and may now too be facing a financial crisis like Japan’s that it may not be able to control, and that could diminish its ability to become the next Asian superpower.”
Like Japan before it, the concern with China is the rapid accumulation of debt could lead to a full-blown banking crisis hitting the nation’s banks as great swathes of assets sour in the period ahead.
According to analysis from Gerard Burg, senior Asia economist at the NAB, combining bank loans, shadow banking, government bonds and non-shadow banking aggregate financing, China’s total debt levels stood at 308% of GDP at the end of 2015.
Based on figures released by China’s Bureau of Statistics and the analysis from the the NAB, that equates to over $30 trillion in debt.
The chart below from the NAB shows the sharp increase in China’s debt-to-GDP ratio over the past decade, fueled primarily by a huge increase in lending from the shadow banking system.
Big, and in all likelihood growing, numbers.
Lost in the chaos of the March quarter GDP, the People’s Bank of China released new lending figures for March that revealed an enormous increase in March.
New lending rose by 1.37 trillion yuan, having increased by 2.51 trillion yuan in January, the largest gain seen since records began in January 2004.
Total social financing – the broadest measure of liquidity that captures lending from non-traditional sources including shadow banking – also accelerated, rising from 780.2 billion yuan in February to 2.34 trillion yuan.
Is it any wonder the economy grew at 6.7% with credit growth of that magnitude?
Based off recent economic indicators such as new home prices and fixed asset investment, along with the recent surge in commodities such as steel and iron ore, it’s likely that a lot of that newly created credit found its way into the nation’s property market and industries that support it.
After backing stocks in 2014 and 2015, it appears the government’s chosen growth engine for 2016 is the property market — the same market where a glut of two to five years of unsold inventory exists in smaller Chinese cities, according to analysis from the Commonwealth Bank.
Not exactly the what you’d expect from the “new” China growth model of services and consumption, nor the sectors that you’d expect to be humming given the government’s pledge to reform these industries given severe levels of overcapacity and mounting levels of indebtedness.
As Linette Lopez wrote earlier this week, this is old China — the sectors the government is supposed to winding down and restructuring — coming in to save the world with its incredible growth machine.
The Chinese government showed us very clearly in its GDP data that it is not quite ready to let that party end, says Lopez.
Picking up on that theme, Societe Generale’s Wei Yao suggested that the acceleration in credit growth and rebound in property-related industries exhibits all the hallmarks of the unprecedented stimulus package adopted by the Chinese government in the wake of the great recession (known in Australia as the GFC).
“This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the “four trillion stimulus” package in 2009,” she wrote. “The consequence of that stimulus was inflation, asset bubbles and excess capacity.”
Not exactly what China, let alone the global economy, needs a repeat performance from.
For all the talk from the government about the need for reform, be it financial markets or industry specific, they’re noticeably absent at present.
Instead of long-lasting market-based based reforms, all we’ve seen from policymakers is a series of attempts to boost growth in the short term, using the same methods of the 2009-2012 era that created the enormous problems the economy is grappling with at present.
Like others, Smith suggests that policymakers need to “move much further to adopt reforms that allow the country meaningfully to be shaped by market forces in the future”.
Seemingly a big “if” based on recent developments in steel, stocks and property.
In the meantime, the debt is accumulating as are the levels of toxic assets sitting on the balance sheets of Chinese banks.
As long as that continues, the risk of a “Japanification” of the Chinese economy will continue to grow, as will the risks of a more pronounced global slowdown, or worse, given the sheer size the Chinese economy has grown to.
You can read more from Bloomberg here.