China released a bunch of grim economic data this weekend. The worst of it being industrial production, which slowed down to its lowest level since doom-year 2008.
It’s a flashback nobody in markets wants to experience and indicates that, unless the government wants to step in, China will be shrinking for the near term at the very least.
Here’s the big picture in the Societe Generale chart below:
Lets do a quick fly-around of all the disappointing metrics.
- Analysts expected industrial production to rise 8.8%, but it came in at 6.9%. That’s down from 9.0% print in July.
- Retail sales rose 11.9% instead of 12.1% as expected and 12.2% in July.
- Fixed asset investment was up 16.5% versus 16.9% expected and 17.0% previously.
All of the spells trouble, and here’s some more — housing sales 11% yoy through January to August, versus a 10.5% drop in the first 7 months of the year.According to Bloomberg Economist Tom Orlick, that slowing in the housing market has been the main driver of all of this discontent.
“A sector that was once the main driver of China’s growth is now suffering a slump in sales and construction. The area of new property under development shrank 14.4 per cent year on year in the first eight months of 2014,” he wrote in a note.
The Chinese government could always put a band-aid on this situation and stimulate the economy by cutting interest rates. However, if the Xi administration has indicated that it’s serious about fiscal reform this time. Earlier this month it passed a budget law that sets new guidelines for how governments can plan spending, financing and revenue.
These new measures would expand the bond market, but they come with more stringent requirements, says Societe Generale analyst Wei Yao.
“Compared to other financing channels, bonds have many merits: they are cheaper and more transparent, and there is less maturity mismatch. Expansion of the government bond market can also facilitate general financial market deepening. However, many strings will be attached to this newly obtained freedom, and in our view imposing strict ex-ante regulations is reasonable, given the early stage of development of China’s bond market.”
The “strings” Yao is talking about would ideally remove the punch bowl from the Chinese infrastructure development party — or at least there would be a bouncer checking identification at the door.
“Formalising local governments’ off-budget borrowing should lead to lower borrowing costs for the state,” said Yao. “However, the trade-off is a less expansive investment plan as local government off-budget borrowing and uses of land sales revenue will be under greater scrutiny.”
That means the Chinese government is trying to pull away gently, but these numbers indicate that even the gentlest pull is ripping the country’s economy at its seams.
The Xi administration has to either stimulate the economy — essentially back tracing on reform — or risk missing its 2014 growth target, according to some analysts.
Tough choice. We know China doesn’t like missing growth targets.