The Chinese stock-market mania has created $6.5 trillion in “value” over the last 12 months. For perspective, that “value” amounts to 63% of China’s 2014 GDP of $10.4 trillion. No other stock market has ever accomplished that much in such a short time. Mainland Chinese have borrowed $348 billion on margin, according to Bloomberg. They want to fire up “value” creation. Everyone is doing it. People are opening new accounts as if there were no tomorrow. And yet, the economy is heading for a hard landing.
Hard-landing gurus have been predicting it for years, and have been frustrated for as long, because there was no hard landing, or even a soft landing, or any landing. China’s economy had turned into a miracle, flying at high altitude, powered by monetary and credit propellants, a construction boom, phenomenal build-out of overcapacity, and strong global demand for its goods.
But now, the magic mix is failing.
China’s exports dropped 2.5% in May year-over-year, after falling 6.4% in April and 15% in March. Global demand for Chinese goods is shrinking overall, with some strength in the US, but falling off sharply in the EU and Japan.
And imports plunged 17.6% in May year over year, after having already plunged 16.2% in April and 12.7% in March. The trade surplus for the first five months has ballooned to a record $217.3 billion.
Something is seriously wrong. The crash in imports was triggered largely by companies curtailing their capital investments, and also by consumers curtailing their spending. They now have more profitable things to do with their money….
It seems every available yuan is being plowed into the stock market, at the expense of the real economy. But stock markets don’t give back the money they “create.” For each person pulling money out of the market by selling shares, there must be someone buying those shares and putting the exact same amount of money into the market. Hence, that $6.5 trillion in “value” that was created over the last 12 months cannot enter the real economy. But by being wrapped up in the mania of the stock market, businesses and consumers, already struggling with other issues, are throttling the flow of money into the real economy.
Nevertheless, the government wants everyone to believe that the economy grew 7% year-over-year in the first quarter, a stellar performance by most other countries’ standards, but China’s worst performance in six years. And likely a bogus number.
Fathom Consulting, which developed the China Momentum Indicator (CMI), reported via Thomson Reuters Alpha Now:
Last week it was announced that May’s official business activity PMI for the non-manufacturing sector in China had slipped to its lowest level since December 2008. It is interesting to note that until early 2013, both our measure of China’s economic growth rate and the official PMI data for the non-manufacturing sector broadly tracked China’s GDP statistics. Since then, the wedge has widened — again calling into disrepute the reliability of China’s official data.
The China Momentum Indicator looks at data from the real economy. And the CMI for April, reported Monday, points at economic growth over the next year or so that could be as low as 2.8%. While that would slightly faster growth in the US than in past years, for China, it’s terrible and problematic.
And the crucial banking sector, under pressure from the government to keep the charade going, is awash in non-performing loans:
Nominal bank lending, one of the three indicators used to create our CMI, rose by just 0.8% between March and April. This is despite a raft of stimulus measures, demonstrating that the People’s Bank of China is struggling to achieve policy traction.
It is not surprising that banks are reluctant to lend when their profit margins are under assault. Just last month, China’s banks were ordered to make loans to local government projects even if the returns to those ventures were so poor that the borrower was unlikely to ever repay the interest or principal loan amount. This will only add to China’s woes, with non-performing loans already estimated by Fathom to be equivalent to around 21% of GDP.
Based on the growing “wedge” between the CMI (yellow line) and official GDP growth (blue line), Fathom estimated that China, in reality, entered a hard landing at the beginning of 2015:
#China Momentum Indicator for April suggests growth could be as low as 2.8% http://t.co/Kj0fTNxg6j pic.twitter.com/dZMUPmLsjq
— Alpha Now (@Alpha_Now) June 8, 2015
Chinese goods are shipped by container to the rest of the world. But containerized freight rates have become an ugly reflection of reality. Read… China Containerized Freight Index Collapses
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One thing that I have a hard time squaring this with is the amount of Chinese people travelling overseas and the amount of money they spend. I mean a bunch of people must be doing really well. Are they going to go home someday and find that they are owing someone a ton of vacation money?
It is possible next year they will vacation in a “Re-education Camp”. I think the party leaders are a little nervous. History shows us that things can go bad and get out of control very quickly. Not a prediction. Just an thought.
Old friend living in SZ China who works for US chip company said just about everybody is enamored by the stock market with whispers of hot tips everywhere. I told her to get the hell out 2 weeks ago and she did with 10% loss (probably mad at me now). People across the income spectrum are feeling good about making money without doing much work and completely mesmerized by the ever rising market. In the past the truly well connected to Commie cadres made easy money and only semi-well to can dabble in the housing markets. BUT this instant riches fever is across the board and many not so well to do sick of 2% int rate are going all in on stock market.
I used to travel to Taiwan and Korean often on business as new engineer supporting mfg there and the Japanese owner of the factory in Taiwan lost all of his money including his factory when the loan sharks (local and from Japan) came knocking in 1990 and yeah the lemming muppets in Japan were gloating over the monster housing and stock market rallies till the music stopped in 1989. Scroll forward 25 yrs and sounds like the bubble in China is many times over…
Folks – this won’t end well as the commie cadres’ worst fear is popular uprsing by the masses who lost their life savings… BTW – Chinese history is littered with peasant uprisings dethroning the dynasties sans last one when the Manchus rode into town.
‘It seems every available yuan is being plowed into the stock market, at the expense of the real economy. But stock markets don’t give back the money they “create.” For each person pulling money out of the market by selling shares, there must be someone buying those shares and putting the exact same amount of money into the market.’
if the money used to buy the shares is being created bcz banks are now lending it when they wouldn’t otherwise have done so, is this true?
When investors sell shares they bought on margin (with money “created” as you said correctly by the bank), they have to pay back the bank with the proceeds from the sale (which “destroys” the money the bank had previously created. So yes, it is still true.
China is looking a lot like the US in 1929. To borrow Yakov Smirnoff’s joke about the USSR, in America everybody’s looking for a party. In China the Party is looking for you. The Chinese people are making hay while the sun shines. When the crash comes it will be 1929 on steroids.
Last week a Chinese ‘investor’ bid up a North Shore Vancouver home by 40% over asking price. There is/was a grass roots mailout movement to try and restrict Chinese property buyers from buying property in various Vancouver Island locations. There is also a movement to impose non-resident tax increases on empty/holding properties.
The Chinese ‘miracle’ seems to be pretty malignant for other countries. Funny how some of the connected are able to sneak their money out to safe havens, while regular folks are stuck playing the markets and buying up building-boom properties in China.
Thankfully, my little red-neck rural valley paradise remains undiscovered. We get Europeans occasionally buying here, but the nearest shopping beyond a highway gas station store is 75 km away. Apparently, the wealthy Chinese prefer shopping over growing their own food which is what most of us do here.
Due to the flood of Chinese money Vancouver and Victoria BC are now unaffordable for new buyers. Actually, I have no idea how anyone can afford to buy property there? Even at today’s low interest rates I would think a purchasing household income must be over 200K per year at a minimum. And even if you already own, property taxes reflect value. What? Is it okay to pay ten, twenty, thirty thousand dollars in property taxes for the joy of living in a city? It’s nuts.
Like I said, the outflowing wealth is malignant. Hopefully, the crash happens soon for the health and sanity of us all.
regards
The smart rich communist Chinese are essentially protecting there money here in the west by laundering there money here. They know it’s going to crash. I have a Chinese customer in my store nice girl and she told me there are no Chinese in Ottawa, just the other Asians ( Cambodia, Vietnamese, Korean ) and all the Chinese are out west in BC. I told her eventually China will crash she agreed with me. I told her to wait on buying property that the market here in Ottawa would come down, and it did around 20% since last year, still will.
But at any rate, I think China is going to be a blood bath when it crashes. I also think that the Western Chinese will want change and they will boot out those 1% communist elites when they figure out what they’ve done and will convert to a Democracy in our lifetime.
All of this money laundering too is just being perpetuated by our western Gov’t’s and there immigration polices. The Harper Gov’t is no different. I will never vote Conservative again. Nor will I ever vote for anyone with the name Trudeau, so I guess my vote this year is going NDP. ugh.. save me …
I’ve also read that the gov’t is going to do a free trade deal with China to eliminate the Tariffs being charged on Chinese goods coming into Canada. But that is another story.
http://ottawacitizen.com/opinion/columnists/glavin-the-questions-politicians-dont-want-us-asking-about-chinese-money
@ Mark,
Scary stuff. I too will hold my nose and vote for Mulcair. I only hope they (NDP) don’t pander to every special interest group, (giveaways), to gain and retain power. Trudeau is a goof. His only work experience was teaching for 5 years at a private school named Pt Grey Academy…(a rich kids prep school). He went from there to full time politician. God help us.