China’s macroeconomic data from July, released recently, has caught the attention of many foreign media and organizations, including Financial Times, Moody’s, JPMorgan and Goldman Sachs. Here are some highlights of their comments and reports.
Gloomy outlook on Chinese economy ‘overdone’
By Financial Times on Aug 16
It has not been a great week for China bulls.
First, data out at the end of last week pointed to a slowing mainland economy as the pace of growth in industrial production and investment fell in the second quarter. Then, in its annual review of the Chinese economy, the International Monetary Fund warned darkly of the risk of defaults on $6 trillion of shadow banking products.
It is possible, though, that the gloom is overdone. “Our analysis of 765 banks in China indicates that recapitalization and bailouts have started and made unexpected (and underappreciated) progress,” notes Jason Bedford, an analyst at UBS in Hong Kong, in a detailed analysis in mid-August. “Write-offs and bad asset disposals have risen threefold since 2013.”
Bedford’s study is one of several indicators that suggest things are not as dire as conventional wisdom — and the many hedge funds with short positions on the banks as a proxy for the Chinese economy — suggest.
One of the banks that Bedford mentions as having made aggressive write-offs of the sort of shadowy products the IMF warns about is Bank of Dalian. It reduced its exposure to what the lender itself refers to as high-risk credit assets and other credit assets by 86 percent — and took a 95 percent drop in profits before tax.
Dalian has the distinction of being based in Liaoning province, in China’s depressed northeast — the only province that actually shrank in recent quarters. In other words, the local economy is so bad that the bank’s executives could not hope to grow out of their problem assets over time in the way counterparts in more healthy parts of the country predict they will.
Last year, Dalian sold RMB 15 billion of nonperforming loans to Orient AMC, one of the four big asset management companies authorized by the central government to buy such problem obligations.
Orient, originally established to buy Bank of China’s nonperforming loans, then went on to take a 51 percent stake in the newly cleaned up bank.
In many cases, management changes can make a big difference to a bank’s results. The founder of one lender in Shenzhen notes that he was able to improve the quality of the bank’s loan book by changing the incentive structure for employees.
Still, there are other hopeful indications for China’s economy. For example, producer prices are expected to stop falling by the end of the year after four years of declines, says Zhu Haibin, chief China economist at JPMorgan Chase. As a result, the real burden of debt will become lighter, providing relief to China’s many indebted corporations — and their bankers.
Moody’s upgrades China’s economic growth outlook
By CNBC on Aug 18
Rating agency Moody’s Investors Service raised its forecasts for China’s economic growth in the wake of “significant” fiscal and monetary stimulus policies.
The ratings agency raised its economic growth forecasts for the mainland to 6.6 percent for 2016 from 6.3 percent previously, and to 6.3 percent in 2017, up from 6.1 percent.
“The slowdown and rebalancing of China’s economy is likely to be gradual,” said Madhavi Bokil, a senior analyst at Moody’s, in a statement.
A better outlook for China would probably help to stabilize the outlook for emerging market economies as well, Moody’s added in a news release on Aug 18.
JPMorgan: End of deflation ‘is the most positive development for China’
By Financial Times on Aug 15
It is just over a year since the renminbi’s surprise 1.9 percent depreciation and an additional 4.3 percent drop in value against the dollar later. Today the delicate balancing act between allowing the currency to slowly drop, yet avoiding giving rise to massive capital outflows, continues.
Meanwhile, beyond the intervention of the authorities to temper the flows, the fundamentals that partly determine the value of the Chinese currency are shifting.
Most notably, China is on the verge of changing from an economy where prices keep dropping to one in which deflation is expected to dwindle to almost nothing. That is a dramatic departure from the past 50 months, when deflation dragged down not only prices in China but in most of the world, thanks to exports of ever cheaper manufactured goods, as well as falling commodity prices.
The end of deflation “is the most positive development for China,” says Zhu Haibin, chief China economist at JPMorgan.
The consequences will be felt both in China and around the world. The deflation was especially severe in producer prices — a reflection of the perpetual oversupply in many sectors of the economy, especially those dominated by State-owned enterprises. Thus in the most recent month, producer prices fell 1.7 percent year on year, compared to 2.6 percent in June. But on a monthly basis, they actually rose 0.2 percent, led by metals prices, thanks to continuing infrastructure and property investment. By the end of July, the country was already on its way to meeting its steel and coal reduction targets, according to research from ANZ. Slower industrial production and less investment is exactly what China requires.
If analysts’ expectations that deflation is coming to an end are right, the real burden of debt will become lighter, providing some relief to over-indebted corporations, and removing the biggest cloud over the country — the concern that the growth of debt is unsustainable and a financial crisis is inevitable. It also takes pressure off the People’s Bank of China to cut interest rates and bank reserve ratios at a time when many fear that monetary policy is too tight, yet the central bank fears lowering rates lest it spark more outflows.
“The real borrowing cost is being significantly reduced for Chinese corporations,” Zhu added. “It was 7 percent to 8 percent last year, but could fall to below 2 percent in real terms.” Moreover, after a trend of lack of profits last year, Zhu expects a far brighter profit picture for 2016.
Other forces are also helping Chinese corporations deal with their debts. Even if the central bank doesn’t lower rates, the banks are under competitive pressure from a domestic bond market that poses an increasingly attractive alternative to loans.
“Chinese bonds have outperformed US bonds in dollar terms since 2014, and China is the only country in the SDR basket whose bonds pay positive nominal and real yields,” notes Jan Dehn, head of research for Ashmore Group in London.
To be sure, inflation is always a double-edged sword. If it rises too sharply, investors could demand higher yields on securities to compensate, and the renminbi could drop, precipitating another more vicious round of capital outflows. But Japan, mired in deflation, shows the perils of that state of affairs. At the moment, Chinese households, unlike their counterparts in Japan, can generally earn positive yields on their investments in the government bond market, lending support to consumption.
This is not the artificially high growth of 2009, which drove global commodities to unsustainably high levels. And certainly, China is probably many years away from being a global safe haven. But at least it no longer appears an imminent sinkhole, either.
Goldman Sachs: Macro evidence shows China’s economic transition
By BBC Chinese website on Aug 15
Those looking for proof of China’s economic transition should focus on micro evidence instead of macro data, according to a research report issued by Goldman Sachs.
The report analyses the changes in the composition of China’s export and commodity consumption as a reflection that China is moving from so-called old economy — led by investment, manufacturing and export — to “new economy,” which is driven by consumption and the service sector.
“While the exports’ share of gross domestic product (GDP) in China today is similar to the level seen in the mid-1990s, the types of goods exported by China have changed significantly,” the report says.
In 1995, footwear, clothing, and toys were among the top five categories of Chinese exports. But by 2014, telecom equipment, automatic data processing machines, cathode valves, furniture and jewelry became the top five.
From the change of export categories, the report says, “China has been moving up the export value chain” from low-profit, labor-intensive products to high-value added products.
Apart from export upgrading, Goldman Sachs also paid attention to the changes in China’s commodity consumption of the past decade.
Import of “new economy” commodities, such as soybeans, nickel and gasoline, have risen in recent years, while “old economy” resources such as wheat, steel, and diesel have been relatively stable, the report says.
It explains that soybeans are often used as animal feed in countries where the demand for meat and dairy is high, nickel is used to make stainless alloys for industrial and consumer products, while gasoline, jet fuel and LPG (liquefied petroleum gas) are better indicators of consumption than industrial-related products like diesel and fuel oil.
The report also says it is a mistake that analysts tend to evaluate the economic transition based on the investment-to-GDP metric, seeing as investment-led growth was a key characteristic of China’s “old economy”.
But the report concludes China’s investment share of GDP is unlikely to fall significantly. “The sharp increase in China’s investment-to-GDP ratio over the past 35 years is comparable to the experience of Japan and the four Asian Tigers [Hong Kong SAR, Singapore, South Korea, and Taiwan] at similar income levels. The broader trend suggests that the investment-to-GDP ratio does not decline until income reaches much higher levels than those in China at present,” the report says.