http://www.telegraph.co.uk/finance/china-business/11098178/Chinas-leaders-refuse-to-blink-as-economy-slows-drastically.html
Premier Li Keqiang is determined to drive through deep reforms and wean the economy off exorbitant levels of debt before the damage becomes irreversible
China’s leaders have brushed aside warnings of an incipient credit crunch in the Chinese economy, determined to purge excesses from the financial system despite falling house prices and the deepest industrial slowdown since the Lehman crisis.
Industrial production dropped 0.4pc in August from a month earlier, a rare event that highlights how quickly China is coming off the boil. The growth of fixed asset investment fell to record lows.
“It is a shockingly sharp deceleration,” said Wei Yao, from Societe Generale. “What is surprising is the calm response from Beijing. The new leadership’s tolerance for short-term pain seems to have jumped by another big notch.”
Electricity output has dropped 2.2pc over the past year as the authorities continue to force dinosaur industries into closure, chipping away at excess capacity.
New credit has fallen 40pc, and there has been an outright contraction of trust loans and undiscounted bankers acceptances over the past two months, the result of a clampdown on parts of the shadow banking nexus. “The shrinking stock of trust loans is particularly dangerous to property developers,” she said.
Fleming Nielsen, from Danske Bank, said there are signs of a “credit crunch” – albeit one engineered by regulators – with bond spreads for low grade corporate debt trading at pre-default levels. He said credit has slowed so much over recent months that it is no longer growing faster than nominal GDP, a crucial inflexion point.
The property market remains dazed, with sales down 13.4pc in August. House prices have fallen for the past five months, with the effects spreading to related industries. The output of washing machines is down 7.5pc over the past year.
Chang Chun Hua, from Nomura, said China’s central bank will have to step in to prevent overkill, predicting five successive cuts of 50 basis points in the Reserve Requirement Ratio (RRR) by the end of next year, and perhaps more radical measures if this fails to do the trick.
The RRR is still 20pc, giving the central bank huge scope for stimulus in a crisis. The rate was in the low single digits in the late 1990. Former rate-setter Li Daokui said a cut to this level today would free up $2 trillion of fresh lending.
Premier Li Keqiang has so far refused to blink, determined to drive through deep reforms and wean the economy off exorbitant levels of debt before the damage becomes irreversible. “We are restructuring instead of expanding the monetary supply,” he said last week, warning markets not to expect easy money to ignite a fresh boom this time.
Mark Williams, from Capital Economics, said the reformist regime led by Xi Jinping is willing to tolerate lower growth provided the economy continues to generate jobs, up by a record 9.7m so far this year.
Urban unemployment has remained stable near 5pc, though the latest data from Manpower showed the “employment outlook index” falling to the lowest since 2009. “As long as the labour market remains healthy, significant policy loosening is still unlikely,” said Mr Williams.
China’s workforce is already shrinking and the flow of rural migrants to the cities is slowing rapidly. It is a sign that the country may be hitting the “Lewis Point” when catch-up growth is exhausted, but it also lowers the risk of a social explosion.
The government’s tough line is a major shift in strategy. The Communist Party has until recently responded to each slowdown with a fresh blast of loans, creating ever bigger problems. The ratio of credit to GDP has doubled to 200pc of GDP in five years – or 250pc by some measures – a faster pace of growth than in any other major bubble across the world in the past 100 years.
Credit is no longer gaining traction. The extra output generated by each extra yuan of loans has collapsed from around 0.75 before the Lehman crisis to nearer 0.2 today. It is becoming increasingly dangerous, for little macro-economic benefit.
The Communist Party’s decision to rein in credit has global ramifications. The $25 trillion edifice is already as big as the US and Japanese banking systems combined. The effects of China’s industrial slowdown is a key reason why iron ore prices have crashed, and global demand for oil keeps falling far short of what was expected.
Whether Xi Jinping’s new discipline will last is an open question. The authorities have already relaxed home purchase limits in most cities, and urged banks to loosen mortgage quotas.
Junheng Li, from Warren Capital, said the real scale of horror in the construction industry is disguised by advanced payments that are simply pocketed as cash flow. “This flatters the balance sheet and understates the true leverage,” she said.
China’s “market Leninists” may find just it as difficult to deflate a housing bubble gently as Japanese and American capitalists before them.
