The Chinese economy had another subpar month during August. Industrial production and investment both slumped below expectations.
It serves as another reminder that the worst is far from over for the world’s second largest economy. Most China experts know that the country faces difficulties in the years ahead. But even they’re becoming surprised by the sheer pace of decline.
Expectations that things should be better are proving the biggest stumbling block.
Industrial production growth actually rose to 6.1%. That’s up from 6.0% in July. Yet economists saw little upside to this. They expected industrial output to grow at 6.6% in August. Why? Because production was already coming off a low base in July. A rebound appeared the only possible outcome…or so they believed.
And that’s the problem. Economists can’t look past their blind optimism that authorities will save the day. They want to believe that China’s aggressive monetary easing is enough to offset decline. But they’re wrong.
The bad news didn’t end with falling industrial output.
Fixed asset investment growth declined to 10.9% between January and August. Fixed investments refer to spending on things like machinery or buildings. Investments grew at 11.2% in the first six months of the year. Economists expected that to carry on into July and August too. Instead, investment growth fell 0.3%.
What does that tell us?
For one, it’s further proof that economic decline is outpacing China’s own expectations. And it backs up other weak economic data coming out of China.
The biggest of these was the tepid trade figures released in August. Both imports and exports declined on the back of sluggish demand from home and abroad. Total trade plunged 8.3% in the year to July. Between June and July alone trade slumped 3.6%. That’s the biggest monthly decline since March.
Things looked bad then, and they look even worse now.
Policymakers will only slow, not prevent, China’s long term decline
The People’s Bank of China (PBoC) didn’t stand idle as these problems mounted.
The central bank cut interest rates five times since November 2014. The cash rate now sits at 4.6%. That’s a 20 year low.
Banking lending requirements, too, have been reduced. The PBoC has cut reserve ratios from 20% to 17.5% since January. Banks now need to hold far less reserve capital to lend to borrowers.
And, just last week, policymakers unveiled new plans to battle economic decay.
Officials hope to lift growth by ramping up spending across the economy. Part of this involves encouraging the private sector to invest more. Chinese authorities cut business taxes to spur this.
They’re also pushing plans to reform state owned enterprises (SOE). Chinese authorities want SOE’s to act more like private businesses. Authorities want fresh private investment to bolster growth. Yet we are in an environment of slowing growth. The problem is that the private sector delays spending when growth prospects are grim.
Getting the private sector to invest more is easier said than done. For now it’s unclear how effective this will prove.
Yet, optimistically, retail trade figures picked up in August. Sales rose 10.8% during the month, backing up the 10.5% increase from July.
But this didn’t convince everyone. Observers were sceptical about the official line on retail figures. The data didn’t match up with what one major retailer was reporting.
Alibaba, the Chinese eBay, recently cut sales forecasts. It also revealed a 3% drop in new car sales. Questions then rose about the reliability of the official figures. If retail trade rose 10.8% in August, why is Alibaba reporting falling sales? None of it adds up.
It is likely that officials are exaggerating consumption growth. Why?
China is eager to prove that it’s shifting away from an export driven economy. In its place, the Chinese consumer will lead the next wave of growth. That’s the plan, anyway.
It could explain why they’d want to announce higher than expected retail sales. If China can demonstrate a thriving retail sector, they might ease concerns over the economy too.
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Where does the Chinese economy go from here?
China’s economic slowdown is a concern for China and the world. The global economy is reliant on robust Chinese demand for growth. It’s even more important for economies growing at paltry rates of between 2 and 3%. Unfortunately, most of the developed world is growing in this band on a yearly basis.
Yet every economy, from developed to developing, needs a healthy China.
Australia depends on China’s appetite for iron ore and coal in boosting the national income. Germany needs Chinese consumers buying its luxury brand vehicles. Even developing economies like Brazil rely on Chinese demand for materials.
A drawn out slowdown could derail global growth for years. Looking ahead, it’s the biggest fault line in the world economy. And the worry is that this decline will accelerate in the coming months and years.
That flies in the face of what policymakers and economic experts tell us.
They told us China’s economic slowdown was manageable. That authorities would fix it. And yet, despite best efforts China’s still shrinking. What gives?
Stimulus measures have done nothing but slow the descent.
Sure, policymakers are cushioning the blows of lagging domestic and global demand. And yes, despite cutting rates five times, the cash rate still remains a high 4.6%. That’s still well above rates seen in the US, Japan, Europe and Australia. All of that is true.
But eventually the truth catches up with everyone.
Pumping more cash into the system might not be a problem for now. But every new round of stimulus only delays the inevitable. Further still, it’s dangerous — setting the economy up for a bigger crash.
The second biggest economy is slowing. The pace of this decline is picking up speed. And every other economy feels the effects.
By October, we’ll have evidence of the speed of the decline. That’s when GDP growth for the third quarter is due. We’ll likely see growth once again falling below expectation. The Chinese can’t fathom anything less than 7% growth.
Economists are now revising growth expectations for Q3. The 7% target looks out of reach. New forecasts put growth of between 6.6 and 6.8% in the third quarter.
So far this year China’s managed to maintain growth of 7% during the first two quarters. Few people believe China actually hit 7% growth in Q2, but we’ll give them the benefit of the doubt. 7% growth in Q3 will be another task altogether. My bet is that even officials will confirm what everyone can see.
You can fool the world only so long. Eventually the truth comes out. In China, the ‘soft landing’ is looking harder by the month.
Contributor, Markets and Money
China’s stock market correction was a wakeup call for many. It was the first big sign that things weren’t right with the Chinese economy. But the panic over China masked many of the problems facing Australia’s stock market.
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