Everything China's doing isn't working

A bunch of data about the state of China’s economy came out on Tuesday night, and all together it told us one thing — everything the government’s been doing to save its economy from going deeper into a slow down isn’t working.

Since November China has cut benchmark interest rates three times, including once on Saturday. It’s also loosened mortgage policies to prop up the housing market.

But none of it’s enough. Especially when you look at the data from last night.

Let’s walk through the scariest stuff:

  • M0 growth, or just the cold hard cash floating around the economy, fell from 6.7% to 3.2%.
  • Total Social Financing, which is a number that measures loans and all credit and debt in the country, fell by 32% since the same time last year. 11% from the previous month.
  • And worst of all, fixed asset investment (that’s people buying houses, equipments for their businesses etc.) fell to its lowest level ever, from over 13% to 9.4%.

Housing sales have improved, but the infrastructure investment that has been the heart of the Chinese economy is on the decline. Buying houses soaks up the supply, but what economy needs is more demand. It’s not getting it, though. You can see that in the Chinese construction sector slow down (-12%), which is suffering the hardest along with mining (-23.9%).

Additionally, as the WSJ pointed out Wednesday, even though the Chinese stock market is booming, construction and mining companies are not the ones raising tons of cash. This is a problem and a major one for China’s economy.

So what should the government do?

“…we think that fiscal policy should now shoulder more responsibility,” Societe Generale’s Wei Yao wrote in a recent note. “Banks risk aversion and weak private sector credit demand has greatly mitigated the impact of monetary policy easing, but the on-budget fiscal policy has more room. Tax cuts and funding for infrastructure projects by the central government, policy banks included, are the best options with the least number of side effects, in our view. In addition, housing sector policy should also be relaxed further.”

In other words, China needs to do more. The measures it’s taking aren’t working. Wall Street expects at least one more interest rate cut before the summer is through, but now analysts are sceptical about how much good that will do.

The word is that there’s a debt restructuring plan for local governments in the works now too, but even that is being met with a raised eyebrow.

“The restructuring will certainly help mitigate liquidity risk at local governments, but we do not think that it is a panacea for either growth or overall financial market risk,” Wei Yao wrote.

So if there’s more of a bazooka somewhere in there China, pull it out. Oh, but not more debt. Corporates are already holding a ton which they have passed on to banks. China’s debt to GDP ratio is already above 250%.

So watch out.

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