China’s Economy Even Worse than Suspected?

It’s always good to have a plan. So China has a new five-year plan, its 13th. And the plan is to dial down China’s formerly white-hot economy to a target of “medium-high economic growth” for the five years starting in 2016.

“The country will promote greater sophistication in its industrial sector and significantly raise the contribution of consumption to economic growth,” according to the Global Times, a tabloid under the People’s Daily, which is the official propaganda organ of the Communist Party. The goal is to double 2010 GDP and per-capita income by 2020 and create “a moderately prosperous society.”

That’s all exciting stuff for the future. Meanwhile, there’s today.

And today, the Chinese economy isn’t exactly hopping, despite the official GDP growth rate of 6.9% that no one believes, especially not the Chinese leadership. So the People’s Bank of China cut its benchmark interest rates a week ago – the sixth cut since November – to the lowest level in the data going back two decades.

The leadership is trying to reform and restructure the economy away from low-value cheap-labor manufacturing to the miraculous powers of consumerism, implemented decades ago with such glorious success in the US and elsewhere. So exports and imports have been plunging. But no big deal because retail and services are going to make up for it. Other problems are cropping up….

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu Jimin, deputy head of the China Iron & Steel Association, explained on Wednesday, according to Bloomberg. Demand for steel, which is used in everything from buildings to cars, has dropped by 8.7% in September from a year ago. Prices have crashed. And steel mills are buckling under their debts even as they’re producing tons of red ink in an ocean of overcapacity.

Car and truck sales, which have propelled China to the largest auto market in the world with double-digit annual growth rates, started to skid this year and actually declined over the summer, year-over-year.

Auto manufacturing, sales, and service are big employers. Manufacturing plants and dealerships are still being constructed at breath-taking pace, at a time when “overcapacity” has become the dark cloud over the industry.

To keep the boom from imploding, the frazzled government flooded the market with incentives. It worked in halting the slide for now: in September, sales picked up a little. But when government incentives are required to keep sales from plunging, it’s going to get tough.

And suddenly there’s another data point…. The Wall Street Journal:

The country’s two biggest oil companies offered a bleak picture of demand from the world’s marginal consumer of the commodity in its latest quarterly results, out Thursday. At Sinopec, the country’s biggest refiner, officially known as China Petroleum & Chemical, total sales of refined products in the third quarter dropped 3.4% in volume from a year before. That’s a marked change from their 5.3% rise during the first half of the year.

Yet this dismal figure is bloated by Sinopec’s increasing exports of refined products, a symptom of China’s excess refining capacity. Strip those out and Sinopec’s domestic sales of gasoline, diesel and more were down 4.2% in the September quarter. At PetroChina, the nation’s second-largest refiner, product sales fell about 2% last quarter.

These are declines in volume, not revenues. They’re not a reflection of any decline in prices. They’re a pure measure of demand for the fuel that makes the vaunted consumer economy tick.

And oil bulls, desperately hoping that miraculously booming demand for oil in China would somehow pull the world out of the oil bust, might have to rejigger their scenarios.

Diesel, used mostly by trucks in China, is a gauge of transportation of goods. Demand for diesel has been weak for the last two years – despite protestations by the government of solid economic growth. Numerous reasons have been cited for low shopping mall traffic, among them booming internet sales. But all retail sales, wherever they occur, entail the transportation of goods. And this should stimulate demand for diesel, you’d think.

And now demand for gasoline has started dropping too in September – and perhaps even more indicative, so has demand for jet fuel!

OK, there is always the argument that vehicles and planes are getting more efficient and require less fuel. But that plays out very slowly over many years or decades, as old vehicles or planes are replaced by new ones. It has no visible impact on a monthly or quarterly basis.

What remains is the notion that activity is declining, that demand for transporting goods is falling, that people apparently are driving less. And now they’re also flying less? This would be a drastic change in an economy that soared at mind-boggling speeds year after year but now is in serious hard-landing mode, with the pilots flailing about to keep it from crashing.

And just when you thought it couldn’t get worse. Read… China Containerized Freight Index Collapses to Worst Level Ever

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  18 comments for “China’s Economy Even Worse than Suspected?

  1. Neil Dunn says:

    To me, most of the events mentioned in the article are somewhat secondary to China’s 3Ds of destruction: Dictatorship(directing the economy), Debt(massive QE), and Demographics(distortion by one-child policy-see below link).

    • NotSoSure says:

      Let’s get real, we in old Merica here have our own 3D

      Dictactorship — see the Fed, the Corpocracy, and the Politicians
      Debt — For real? Merica is still the most indebted country on earth if you count all the liabilities.

      For the other D, I would choose Delusion i.e. it’s the most advanced nation on earth. I suggest you travel a bit. Our Internet infrastructure sucks, our airports literally stink, and forget about public infrastructure. Pretty much all 3rd world country.

  2. MC says:

    One has to wonder at the disfunctional behavior of China’s numerous bureaucracies.
    One one side 6.9% GDP growth, on the other crummy to frankly worrying figures on everything from fuel sales to steel production.
    Honestly I would be surprised if, given deflationary pressures and large scale capital outflows, China’s real GDP grew at all this year.

    Regardless, I recently read China’s imports of oil to fill their SPR may have to stop soon as they are running out of storage capacity. This was to be expected given tankers had to wait at least two weeks to download their cargo already in August.
    Oil bulls may be having their brief vacation due to the now meaningless “declining oil rig count in the US” (haven’t they heard of pad drilling? Even I have!) but once those Chinese SPR purchases are reduced or even stopped they’ll be back at hoping and praying OPEC somehow convinces the Saudi and their Gulf allies to stop their battle for market shares with Russia and the joint (albeit probably uncoordinated) Russian/Saudi plan to financially outlast the US and Canadian oil industries.

    Anyway, the shopping season approaches, hence those container ships filled with Christmas decorations, sweaters and tablets must have already left Shanghai. Anybody got any news on they are doing?

  3. Bob Miller says:

    Okay, so the merry-go-round is slowing down not only in China, but everywhere. Still, who do know that’s broke and indebted? Everyone I talk with says their home, vehicles and household goods are paid for and they have some cash put back. So exactly who are all these indebted people that are going to suffer if the DOW goes to 5,000 next week? I can’t believe it’s the Millennials. Most of them are still living at home. If they’re out on their own they are sharing an apartment and car. I read that 50% didn’t actual own anything other than the clothes in their closet, maybe a pet and possibly some sexually stimulating drugs.

    • interesting says:

      i guess it’s me that’s broke, i’ve not been able to raise prices for almost 20 years and i’m doing projects in some cases for the same amount i did them for in the late 80’s,

      almost my entire customer base has abandoned the USA and is having the work done in China, it’s now my bread and butter customers (smaller tier 2 type shops) that are jumping on the china price band wagon.

      i don’t really have any debt (except back taxes) but i also don’t have any extra money to buy anything and as of January 2015 it’s as if somebody turned a switch and the work has dried up, if it wasn’t for this one customer right now i would be really fucked. Every time i start filling in the hole that gets dug in the slow times the work just seems to stop coming in and then i start digging the hole again.

      i think 2015 is much like 2007, IMHO.

    • Sabbie says:

      It’s the retirement accounts that will get wiped out er I mean transferred. Also I would not be overly confident about that cash put back if it is in our banking system.

    • Peepot says:

      Either you are retired — or a wall street banker.

      Because Americans are up their ears in debt – they are flat broke

  4. CrazyCooter says:

    If I read the opening correctly, “greater sophistication in its industrial sector” sure sounds like automation to me and can’t be good for workers who will … and this is RIGHT after the first quote … “significantly raise the contribution of consumption.”

    The growth they are talking about is 7% per annum with half of it in the rear view mirror, another aspect that is curious. Why not just proect the NEXT ten years? This is the classic (to quote ZH) Biryani ruler (i.e. projecting in a straight line) and almost assuredly means things are going south of there with certainty (or they wouldn’t say anything in the first place).

    Read it how you want, but this sounds deflationary as hell to me.

    The US Dollar, while discussed at great length, sometimes technically, is the reserve currency, it is also long in the tooth for fiats and the US Goobermint is doing really weird shit these days. Folks who don’t know the average lifespan of unbacked non-asset currency (i.e. fiat), should read Ralph Foster’s Fiat Paper Money:

    I thought I was pretty well read on certain topics, such as the US Colonies, and I learned quite a bit. Some stuff was completely new to me (historically speaking). There is also a significant investment in the originators of “paper” money; the Chinese (about 1000 AD IIRC).

    I found this book years ago, but didn’t think about it recently until I got into an argument last night with my spouse who is focused on finding return for savings where as I am focused on mechanics of systems. Otherwise I probably wouldn’t have mentioned it.

    Anyway, if you want to skip all that, EVERYTHING has a lifecycle (i.e. nothing lasts forever) and if you use the Nixon gold window as a benchmark, and use the average fiat currency as a model, we are getting into the SHTF territory.

    A final comment. My first purchase of his book was random (amazon maybe?) but my second purchase was for multiple copies and I actually got them from Ralph directly (ebay?). He threw in a chapter update at the time. Shop around for price and value. :-)



  5. Jeff says:

    Bob Miller, what world are you living in?

    “Everyone I talk with says their home, vehicles and household goods are paid for and they have some cash put back. So exactly who are all these indebted people”

    Please define “Everyone”?? I think you forgot to poll the majority of the working middle class, and millions of unemployed that have had their jobs exported over seas.

    “So exactly who are all these indebted people that are going to suffer if the DOW goes to 5,000 next week?”

    A couple groups come to mind. The over leveraged twits swimming with no shorts on, that have been pushed further and further down the rabbit hole thanks to QE and ZIRP. And then you have the poor sap that has a substantial amount of money invested in what he or she believes is a “safe” low risk investment. But that may not be the case because of the shit show that is the Derivatives and Shadow banking sectors just waiting to collapse under their own weight. The DOW plunging to 5000 might be the trigger needed to light this stack of dynamite!

    ” I can’t believe it’s the Millennials. Most of them are still living at home. If they’re out on their own they are sharing an apartment and car. I read that 50% didn’t actual own anything other than the clothes in their closet, maybe a pet and possibly some sexually stimulating drugs.”

    And why do think this is?? Because they are in DEBT up to their F*#king eyeballs with student loan debt and are having a hell of a time finding a job that pays a living wage! OR, they have health issues from eating shit food, because it’s all they can afford and have Medical bills and other health care debt burying them even further.

    Just a little dose of the reality that I experience daily. I have a mortgage, I have student loan debt, I have a car payment, and luckily I have my health aside from injury’s sustained from racing motorcycles. I have a decent paying job that affords my Wife and I to have a “comfortable” lifestyle in New Zealand. I try not to let money or the more proper term “currency” rule my life. It is all a twisted, corrupt game that will end or undergo major changes in my lifetime I am sure. Thankfully my family owns property in SW Colorado that I view as my “Alamo”. If shit hits the fan, that’s were I will be, living off the land and off the grid as much as possible.



    • Zzzttt says:

      Lol. If things get so bad that you have to start a subsistence farm in rural America, you better also bring a shotgun.

  6. AC says:

    I have no doubt the Chinese government will be issuing glowing press releases going forward, regardless of reality – until the last of them starves or gets hanged or gets eaten, by some of the other survivors.

  7. Brian702 says:

    “China and Germany signed a deal on Thursday that will see Chinese airlines buy 130 jets manufactured by Airbus Group SE…” -when I read this I felt a disturbance in the force. Now I know why: less fuel demand will limit air travel. Or maybe the jets will be built in China, and flown by Germany? “To help secure more orders in China Airbus agreed in July to build a 150 million-euro completion center for A330 wide-body jets in Tianjin” What I want to know is if the jet I am a passenger on was made in the U.S.A., or Tianjin? (Reuters quotes)

    • Steve in Flyover says:

      Completion Center = paint and interior/upholstery

      No tech transfer involved. Only thing getting transferred are the semi-skilled jobs of some of the wretched refuse.

      The tech jobs in aerospace are going to Mexico.

    • MC says:

      Well, these days Airbus and Boeing are a whole lot like car factories. They design the product and they assemble it in Seattle and Toulouse/Hamburg using components outsourced all around the world. Just to give an example most of the Boeing 787 Dreamliner fuselage and wings are made in Japan, the 737NG landing gear is made in Italy (the OG one was made in Yugoslavia/Serbia) and the Airbus A380 wings are made in Great Britain.

      China’s aircraft industry has been advancing by leaps and bounds in the past fifteen years but they chiefly concentrated on military jets so far. They’ve gone from rehashing decades old Soviet designs to building hundreds of highly sophisticated fighters on par with anything built in the US, Russia and Europe.
      Where the Chinese are still lagging behind, and this is what has been holding them back in the airliner sector, are the engines.
      On military designs this is hardly a problem, as the Chinese have been following the old Soviet practice of sacrificing durability to have performances: swapping out an engine every x hours is a price their military has no problems paying.
      But airliners are all about reducing maintenance to cut costs: Boeing and GE came up with the MEA (More Electric Aircraft) concept precisely to cut maintenance costs and make their products more palatable to airlines often working on rice paper thin margins.

      Now: the Chinese have had absolutely zero problems using pilfered technology in their military aircraft. Just to give an example one may be forgiven for thinking the much feared J11 heavy fighter is built under license from Sukhoi of Russia while in reality it’s an unautorized copy of the Su27-30 series. Chinese hackers working for their government have displayed incredible skills at violating the most secure internal industrial networks and making off with enormous volumes of data.
      But one cannot sell a civilian aircraft using stolen patents abroad without encurring in the ires of the WTO. It’s one thing to copy Honda lawnmower engines and GoPro cameras and quite another to attempt selling a cloned GE aircraft engine. As brazen as the Chinese are, it’s something not even them would do.

  8. Julian the Apostate says:

    Go easy on Bob he’s worked hard all of his life and has a couple of nickels to rub together, his friends and acquaintances are probably the same. It is anecdotal evidence and it’s not necessary to make a mountain out of a molehill. There is plenty of information out there on the plight of the Millennials. I say plight because what they’re suffering by and large has been inflicted on them by the system, which was screwed up long before their arrival. Several Millennials have commented here that they are doing quite well thank you very much. We are all here reading Wolf and the gang for the same reasons no matter where we fall on the age curve. Sniping about things we have no control over is not productive but is nonetheless human and a little venting amongst friends is cathartic. ?

  9. Rob Chin says:

    Wolf, why won’t you publish my post?

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