China reported a bunch of key numbers on Monday night, that showed slowing growth all around.
- GDP growth slowed to 7.3%, under the government’s 7.5% target.
- Property market sales fell 10.8%.
- Fixed asset investment fell to 16.1% from 16.5% at the same time last year.
The only real bright spot was industrial production, which was up to 8% from 6.9% at the same time last year, but was boosted by exports, not domestic consumption.
It sounds rough, but these numbers are totally perfect for Beijing. They mean that the economy is slowing — just as analysts and government officials have expected — but not so much that the state has to step in and take dramatic action.
Because Beijing wants the Chinese economy to cool down and normalize to one based more on domestic consumption than international investment, it has maintained that it will allow this slowing and not intervene by loosening interest rates and turning on the hot money spigot.
Instead it has been patching up the ship where it leaks, taking “targeted easing measures” and injecting the economy with small amounts of cash here and there. It’s a band-aid policy. The government is hoping that domestic consumption will improve enough to heal China’s economy before it’s time to take the band-aid off.
But there are two problems with this.
First, as Societe Generale analyst Wei Yao pointed out in a note, we’re not seeing that improvement in domestic consumption yet. We’ll have to wait until October to see if targeted easing measures — like a relaxation on mortgage requirements — have impacted domestic demand.
In the meantime, we’re seeing troubling signs from China’s corporations. China’s producer-price index has deflated 6.7% in the past 36 months. Corporate margins are thin, and companies — already carrying a ton of debt — are taking on even more to ride out this period.
And it could be a while.
“…there is no change to our view that the structural growth deceleration will continue in China as debt deleveraging and excess capacity (including that in the housing sector) weigh on investment,” Yao wrote in her note.
The second is problem is that China needs to address this problem with debt eventually. A bunch of these companies — especially in the property sector — are going to need to be restructured. Some are already showing major weakness.
Now that restructuring could be orderly, or it could be chaotic.
But either way the band-aid’s got to come off.