China Delivers "Surprisingly" Great Economic Data Across The Board, Yuan Yawns

Following more dismal data from the US, hope for global growth remains in China and they did not disappoint. Despite slumping macro data, a major slowdown in real estate, and the nation"s deleveraging efforts in the last three months, GDP beat, Retail Sales beat, Industrial Production surged, and even fixed asset investment was above expectations. The Yuan hasn"t moved.

For the last three months, Chinese data has been disappointing, along with US, as the collapsing credit impulse leaks into reality...

But exports and consumer spending have been pillars for the economy over the second quarter, offsetting the curb on leverage, and tonight"s data shows that none of that matters.. because the deleveraging economy beat across the board

• China GDP BEAT 6.9% (exp +6.8%, prior +6.9%)


• China Retail Sales BEAT 11.0% (exp +10.6%, prior +10.7%)


• China Fixed Asset Investment BEAT 8.6% (exp +8.5%, prior +8.6%)


• China Industrial Production BEAT 7.6% (exp +6.5%, prior +6.5%)

As the charts below show, more of the same well-managed data to show that all is well enough that hope remains...Strong growth again reflects an economy awash in credit, foretold in the latest new yuan loans (1.54 trillion yuan) and aggregate social financing (1.78 trillion yuan).

Enda Curran, Bloomberg"s Chief Asia Economics Correspondent, notes that at first glance there"s not a lot for the bears in these numbers given they appear strong across the board. The backdrop though continues to be one of cheap credit and mounting risks. That"s an issue policy makers say they are aware of but for now, it seems like growth above all else is key.

Iris Pang, greater China economist at ING Bank in Hong Kong:

"Higher than expected GDP growth comes from strong industrial production. That said, the gap between FAI growth and industrial production growth tells the story that it is consumption and export driven growth."

Julian Evans-Pritchard, China economist at Capital Economics, said the strength seen in the data seems unlikely to last:

"The recent crackdown on financial risks has driven a slowdown in credit growth, which will weigh on the economy during the second half of this year.

"What’s more, the National Financial Work Conference that concluded over the weekend has signaled that further regulatory tightening remains on the horizon."

We wonder how long before the lagged response to the credit impulse collapse hits GDP... (NOTE the weaker and weaker reactions in GDP to credit impulse surges)

The reaction in Yuan is underwhelming for now... (after its biggest weekly gain since March)

China"s stock market ripped back higher (after an early plunge) ahead of China"s data dump, and held those gains as the data hit (we wonder if someone got wind of the data a little early?).

As a reminder, Japan is closed for a holiday so we are not getting the usual juice from BoJ shenanigans on any move.

China's Ghost Recovery

Authored by Jeffrey Snider via Alhambra Investment Partners,

To the naked eye, it represents progress. China has still an enormous rural population doing subsistence level farming. As the nation grows economically, such a way of life is an inherent drag, an anchor on aggregate efficiency Chinese officials would rather not put up with. Moving a quarter of a billion people into cities in an historically condensed time period calls for radical thinking, and radical doing. In one official party plan, it was or has to happen before 2026.

The idea has been to build 20 new cities for this urbanization, and then maybe 20 more. It led to places like Yujiapu in Tianjin. China’s answer to Manhattan was to include a replica Lincoln Center, a Rockefeller Center and even twin towers. Built to fit half a million, barely 100,000 live there.

There are numerous other examples of these ghost cities, including Kangbashi dug out of the grassy plains of Inner Mongolia. It is in every sense a modern marvel, 137 sq. miles of tower blocks and skyscrapers that sit almost entirely empty. There are now plans to build yet another one, south of the capital Beijing this time, to supposedly relieve pressure and pollution of that city’s urban sprawl. In the Xiongan New Area, this newest city will be three times the size of NYC, enough, if plans were ever to actually work out, to draw almost 7 million Chinese.

These are mind-boggling numbers and end up making truly eerie places for the few times when their existence is allowed to be acknowledged in the mainstream. The reasons for them are really not hard to comprehend, however.

The older ghost cities started out as pure demographics, a place for China’s new middle class to urbanize and economize. The more the rest of the world demanded for China to produce and ship, the more Chinese (cheap) labor it would all require. And there had to be something other than slums for this to happen, else any such intrusive transformation risked what was and remains a delicate power balance.

Then in 2008 suddenly the world paused in its love affair of Chinese-made goods. No problem, though, as Chinese officials assuming it was temporary merely sped up the process of building for the future, getting ahead of the curve, as it were. Surely China would need to after the full global recovery get right back on the same trajectory as before.

That never happened, and though some economists in particular still believe it will, there isn’t the slightest sign of global demand getting nearly that far back. What do you do, then, if you are China? There is logic to keeping up the illusion, that the future will eventually look a lot like the “miracle” past, because what else would China Inc. otherwise do? If it won’t be building stuff for export to the West, then it will have to be building something.

No matter how many times in the Western media they say demand is robust, catching up, or resilient, the Chinese know better.

China’s overseas shipments rose from a year earlier as global demand held up and trade tensions with the U.S. were kept in check amid ongoing talks. At home, resilient demand led to a rise in imports.

Demand for Chinese products has proven resilient this year as global demand holds up.

Chinese exports in June 2017 are estimated (currently) to have risen 11.3% year-over-year. It sounds like what was written above about the global condition. But in truth, 11% growth, as 15% or even 20% growth at this stage, keeps China in the ghost city state. It isn’t anything close to “resilient”, let alone enough to make up for lost time and absorb the empty cities already built.

There are instead already indications that China’s trade statistics are topping out – at levels not yet even as much as the insufficient growth rates produced in 2014. For the three months of Q2 combined, exports rose by just 8.1%. While that was the best quarterly rate in more than two years, it was less than what decelerating global demand required of China in Q4 2014 in the early stages of this “rising dollar.”

On the import side, the increase in June was for the fourth straight month less than 20%. Given the dramatic contraction especially in 2015 of Chinese imports, 20% only seems good outside of relevant context. After China’s experience with the dot-com recession, by contrast, by early 2003 imports grew by sustained 40% for several years.

The media can talk in glowing terms all it wants about China’s economy, but the truth is very different. It is instead consistent with the rest of the global economy in 2017, striking only for the distinct lack of momentum as “resiliency.” Enough time has passed since the end of the downturn in 2016 that if this was going to change it would have.

Whether in trade or local economy terms, going back to 2011 there is a ceiling on even the rebounds. There is something still very wrong with the economy, as even though it might be better this year than last it is still far short of normal. That is a reflection here through China on the rest of it.

Unless and until Americans and Europeans start buying Chinese goods again, any goods for that matter, there will have to be more ghost cities coming. Neither rebalancing nor global recovery are in China’s future. A 2014 Chinese government study concluded that as much as $6.8 trillion in so-called investments had been wasted from 2009 to that point. In the strictest sense it certainly seems to have been, but, again, what else were they going to do? Economists called it “stimulus” and still do, but in truth it was actually the last option in maintaining the (recovery) lie.

They are not ghost cities.  It is still a ghost recovery.

China Vows To Refrain From "Mega Economic Stimulus" As 'Two Sessions' Begins

The US has Jeff Sessions, but China is about to have "two sessions".

Starting Sunday is a two-week period of heightened political discourse, if not exactly debate, among the top echelons of China"s Politburo, also known as China"s "two sessions."

The China People"s Political Consultative Conference (CPPCC) starts on March 3 and will conclude on the 13th. The National People"s Congress (NPC) will start on March 5 and last until the 16th. On March 5, Premier Li Keqiang will announce 2017 economic targets (e.g., GDP growth and CPI) and policy measures including fiscal and monetary policy (e.g., on-budget deficit, M2 and TSF) in the morning session of NPC. A number of senior economic officials, including Premier Li, will also hold press conferences during the meetings to provide further details/clarifications on policies in major economic fronts.

In previewing what to expect from the "two sessions", this week Xinhua reported that China will "not flood the economy with government investment as it pursues more stable, healthy economic growth," an official with the top economic planner said Wednesday. "Instead, it will focus on supply-side reform for a modest expansion of aggregate demand," said Li Pumin, secretary general of the National Development and Reform Commission, at a news conference.

Li made the remarks when answering a question on whether China would roll out a major stimulus plan like in 2008.

"Stimulus plans are used to prop up weak demand with government investment under special circumstances," he said, adding it was different from the scale of fixed-asset investment (FAI). It was recently reported that 23 provincial-level regions had announced FAI volume totaling some 45 trillion yuan (about 6.54 trillion U.S. dollars) for 2017, stoking concern of a gigantic stimulus plan.

Li dismissed the worries by saying FAI volume is the aggregate rather than newly-added investment and includes investment from the public and private sector. The FAI volume of 32 provincial-level regions rose 7.9 percent year on year to 60.65 trillion yuan in 2016 and is likely to hit 65 trillion yuan, Li said.

After China"s economy entered a "new normal" stage, the major difficulties were a by-product of supply rather than demand, he said. The addition of excessive production capacity and redundant projects will be forestalled, and more efforts will be made to meet demand with effective supply, he added.

The overarching theme over the past few years has been China"s attempt to transition its export- and investment-driven growth model into one that draws strength from consumption, innovation and the service sector. Consumption contributed 64.6 percent to China"s GDP growth in 2016, up 4.9 percentage points from 2015, official data showed.

In the process, however, China has also been quietly fading out some of its legacy industries, such as coal, where as reported on Wednesday, Beijing warned it would have to "reallocate" some 500,000 mostly coal and steel workers (to start) into growth industries, such as ridesharing and taxicabs.

"This year we will continue to cut capacity in coal and steel," Yin Weimin, the head of China"s Ministry of Human Resources and Social Security, told reporters. "We will need to reallocate jobs to 500,000 workers," he said, including assigning workers different jobs within the same or a different company, early retirement or encouraging them to become entrepreneurs.

Weimin added that China will introduce a policy this year to encourage the development of new industries, for example internet-related industries, that will create new jobs, he said. In 2016, he said that China reallocated jobs to 726,000 coal and steel workers "without any major problems", adding that China"s overall employment outlook in 2017 is expected to remain relatively stable, despite the government facing immense pressure to create jobs.

Meanwhile, China has decided to adopt a "prudent and neutral" monetary policy this year to keep liquidity at an appropriate level and avoid large injections. Official data released Wednesday showed that China"s manufacturing purchasing managers" index expanded for the seventh month in a row to hit 51.6 percent in February, further evidence that the world"s second largest economy is stabilizing amid the uncertain global outlook.

In this context, the following Goldlman analysis puts in context the past two years of Chinese economic growth and momentum  and what has driven them. The chart below plots the decomposition of moves in China"s 5-year swap rates into the two market-implied macro drivers. The results provide an intuitive qualitative assessment of market moves since mid-2015.

August 2015 to January 2016 – deteriorating growth expectations: From mid-2015 through the beginning of 2016, as policymakers began another round of RMB reform, growth expectations deteriorated sharply. Falling growth expectations weighed on interest rates, although the downward pressures were partially offset by an incremental hawkish shift in the markets" expectation for monetary policy, perhaps given the backdrop of the substantial capital outflows that followed the RMB depreciation episodes in August 2015 and early January 2016.

February to Oct 2016 – improving growth expectations, easier policy: From late January 2016, a broad improvement in growth expectations on the back of a meaningful quasi-fiscal credit impulse pushed towards higher swap rates. However, from the perspective of the interest rate markets, the improving growth expectations were more or less offset by expectations for easier policy, leaving swap rates broadly unchanged.

Since Oct 2016 – tighter policy expectations, continuing improvement in growth expectations: Since October 2016 swap rates have moved higher by over 100bp. Our decomposition suggests that over two-thirds of the increase in swap rates through mid-December 2016 was related to a more hawkish shift in markets’ perception of monetary policy. The more hawkish shift in policy expectations also weighed on equities through the end of the year, although this has reversed recently as market growth expectations have continued to improve steadily.

Hawkish shift in PBoC policy perceptions key driver of higher swap rates since October
Contribution of growth and policy shocks to move in China 5-year swap rates

Perhaps more than anything, the above implies that, as Deutsche and UBS both warned recently, the period of Chinese upside momentum and credit-impulse contribution to global growth is about to end. For those who missed it, here is what UBS said:

"Our global credit impulse (covering 77% of global GDP) has suddenly collapsed" and explains that "as the chart below shows the "global" credit impulse over the last 18 months is essentially mainly China (the green shaded bit), which even now is still creating new credit at an annualized rate of around 30pp of (Chinese) GDP. But the credit impulse is the "change in the change" in credit and even the Chinese banks could not sustain the recent extraordinary pace of credit acceleration. As a result: whereas back in Jan "16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China"s contribution is -0.3% of global GDP).

So while it may seem rather distant and boring compared to the daily scandals emerging daily from the realm of US politics, the fate of global economic growth in the near-term will be determined in Beijing over the next 2 weeks. Our advice is to drown out the noise as much as possible, and follow developments in China closely.