Is China’s Economy in even Deeper Trouble than We Think?

Rail freight volume plunges to 2007 levels.

Rail freight volumes are an indicator of China’s goods-producing and goods-consuming economy, not just manufacturing, construction, agriculture, and the like, but also consumer goods. Thus they’re also an indication of consumer spending on goods. Alas, rail freight volume is collapsing: the first quarter this year puts volume for the whole year on track to revisit levels not seen since 2007.

While China’s economy was strong, rail freight volumes were soaring. For example, in 2010, when China was pump-priming its economy, rail freight volume jumped 10.8% from a year earlier. In 2011, it rose 6.9%. It had soared 44% from 2005 to 2011! But 2011 was the peak.

In 2012, volume in trillion ton-kilometers declined one notch and in 2013 stagnated. But in 2014, volume skidded 5.8%. And in 2015, volume plunged 10.5% to 3.4 billion tons, according to Caixin, citing figures from the National Railway Administration. It was the largest annual decline ever booked in China.

It was a year that the People’s Daily, the official paper of the Communist Party, described in this elegant manner:

Dragged by a housing slowdown, softening domestic demand, and unsteady exports, China’s economy expanded 6.9% year on year in 2015, the weakest reading in around a quarter of a century.

Which is precisely where things stop making sense: rail freight volume plunges 10.5% in 2015, and the economy still increases 6.9%? I mean, come on.

At the time, Caixin said that China’s central planners aimed to increase rail freight volumes to 4.2 billion tons by 2020. This would assume an average annual growth rate of 4.3%. So these declines are not part of the planned transition to a consumption-based economy. They’re totally against that plan or any other plan. They’re very inconvenient for the rosy scenario!

Then came the first quarter of 2016.

Rail freight volume plunged 9.4% year-over-year to 788 million tons, according to data from China Railway Corporation, cited today by the People’s Daily. At this rate, rail freight volume for 2016 will be down 20% from 2014, which had already been a down year! At this rate, volume in 2016 will end up where it had been in 2007!

China — hobbled by soggy domestic demand, perhaps even soggier demand overseas, rampant factory overcapacity, cooling investment, an insurmountable mountain of bad debt, and a million other domestic problems — may be trying to transition from a manufacturing-based economy to an economy based on consumption.

But even consumer goods must be transported, even those purchased online! Only services don’t require much transportation. But we doubt that service sales have jumped in two years to the extent that they would even halfway make up for the crashing demand for goods transported by rail.

The World Bank just figured that China’s economy would grow 6.7% in 2016, the IMF pegs it at 6.5%, both kowtowing to the GDP declarations issued by the Chinese government. Whose Kool-Aid have they been drinking? This would make 2016 another year when rail freight plunges by a dismal 10% or so while economic growth soars nearly 7% – which would make China one of the fastest growing economies in the world. So something in this convoluted, government-imposed math doesn’t add up here.

Add this to the major global risks: No one knows what’s going on in the second largest economy in the world, perhaps not even the Chinese government. And perhaps just about everyone – possibly even the much-maligned hard-landing gurus – overestimates China’s growth and its demand for global goods.

After years of big wage increases in China, the supply of cheap labor is coming to an end. As the cost of labor has soared, the manufacturing base is migrating to cheap-labor countries, leaving less work in Chinese cities for migrant laborers. With few options left, they’ve started to return to their villages. This leaves China with massive challenges, just when its debt-burdened economy can least afford them. Read… China “Could Push Whole World into Fresh Economic Crisis”

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  50 comments for “Is China’s Economy in even Deeper Trouble than We Think?

  1. Chris says:

    China’s economy is a fraud and has been for some time. If we are being honest with ourselves it should be obvious that unsustainable debt creation does not lead to growth but rather bubbles. China may be the biggest bubble in the recorded history of humanity (followed closely by the US economy). This is a great scheme if you are trying to make fast money (note the influx of Chinese money into the US real estate market – like rats leaving a sinking ship). The rest of the global economy is in much the same boat and the whole sad affair is glossed over by the propaganda being spewed out by the government, the FED and the co-opted media. The US is facing the real prospect of a very significant deflationary event as more and more troubled economies continue to deteriorate and investors seek some sort of safe harbor in the US dollar. After all, real estate is set for another “adjustment” to put it mildly. This situation is a total house of cards just waiting for the next black swan to flap its wings and blow it over. China may be the next shoe to drop, but notwithstanding the enormity of the repercussions when this happens, the other shoe (namely the US economy) will be the death knell of the modern economic system. Some, myself included, think this may ultimately be a good thing. Sadly, there will be a lot of suffering before things straighten themselves out, if ever.

    • Akam15 says:

      Come on buddy. That’s a bit dramatic even for Wolfstreet. I’m guessing your dooms day prognosis has not made you or anyone else a dime. Go hoard your gold and rifles in your underground bunker while the rest of civilized society enjoys the sun and fresh air.

      • Thomas Malthus says:

        Think again on China —it is a nuclear financial time bomb ticking away….

        The New Middle Kingdom Of Concrete And The Red Depression Ahead

        No wonder the Red Ponzi consumed more cement during three years (2011-2013) than did the US during the entire twentieth century. Enabled by an endless $30 trillion flow of credit from its state controlled banking apparatus and its shadow banking affiliates, China went berserk building factories, warehouses, ports, office towers, malls, apartments, roads, airports, train stations, high speed railways, stadiums, monumental public.

        In short, China has become a credit-driven economic madhouse. The 50% of GDP attributable to fixed asset investment actually constitutes the most spectacular spree of malinvestment and waste in recorded history. It is the footprint of a future depression, not evidence of sustainable growth and prosperity.

        Consider a boundary case analogy. With enough fiat credit during the last three years, the US could have built 160 Hoover dams on dry land in each state. That would have elicited one hellacious boom in the jobs market, gravel pits, cement truck assembly plants, pipe and tube mills, architectural and engineering offices etc. The profits and wages from that dam building boom, in turn, would have generated a secondary cascade of even more phony “growth”.

        Read More

        Are you saying you dispute any of the facts in the Stockman analysis?

  2. Petunia says:

    All those ghost cities in China contribute to the problem. Since they are a controlled economy they should not allow real estate to be built unless it will be owner occupied. All those empty apartments don’t have kitchens, bathrooms, furniture, or people who need stuff. The Chinese investment in real estate in the west creates the same problem. It drains their economy and produces ghost houses here which don’t need furniture or appliances, and don’t have people who buy stuff. They are exporting deflation on a massive scale.

    • Petunia says:

      On a related note:
      Since home ownership is down in America due to the job market. I have noticed, in my case as well, that all that moving around for jobs creates the need to downsize. When buying anything the consideration of moving it down the line is very real. Many times I walk away if I know I may have to abandon an item, sell it, or deal with the headache of moving it. I don’t buy knickknacks any more, too much trouble. Expensive furniture is too risky. We had to trash an expensive entertainment cabinet in our last move because the movers wrecked it and we couldn’t afford the insurance to cover it.

      All of this mobility by necessity is affecting the consumption of household goods in a profound way. The bigger the rental market becomes the less people will invest in household goods. Which in turn affects freight in America. In our last three moves the haul was smaller each time.

      • Edward Hall says:

        Just purchase a motorhome, to be more mobile. My wife is a successful RE Broker, so that must say something. A large percentage of her clients are downsizing on TAXES, which in FL generally means further out, and smaller.

      • CENTURION says:

        There is an “ol’ wives tale”…….3 moves equals one Fire.

      • chris hauser says:

        perhaps we could have a national yard sale, but that just rearranges the stuff……

        my preference would be national demo day, for all the vacant unsalvageable houses in detroit, cleveland, baltimore……

    • MC says:

      But you see, the sale/lease of land and necessary permits to build those apartments are the prime source of financing for municipalities in China. Not to mention housing is the main driver behind the stupendous Chinese steel mill and pretty much the sole one behind their nigh on unbelievable cement production. not to mention copper wiring, glass panes, solar panels etc.
      In short it’s the Ouroboros problem.
      Right now the housing bubble in China is more or less at maximum capacity except in first tier cities (Geijing, Shanghai, Shenzen and Guangzhou), where it’s still going strong.

      And always remember housing in China had some worrying pyramid scheme characters: very much like with in the Shenzen Small Caps, the “dumb money” chased after housing not to rent it out, not to live in it, not to give it to the future generations, but exclusively to sell it a higher price down the line to some greater fool.
      If supply in first tier cities is limited and the game can go on, no such problems exist elsewhere. The governor of a third tier city can create hundreds or even thousands of apartments at a stroke of a pen, especially if he’s under pressure from Beijing to deliver GDP growth and if local banks have been instructed by the PBOC to “be helpful”.
      Suddenly the dumb money is sitting on a lot of poor quality concrete and dubious electrical wiring.

      Finally there’s the issue of population. There are doubts China truly has all the people she claims to have. It has been alleged (and not convincingly denied) many internal migrants are counted twice, first in their province of origin and then in their province of residence, to beef up numbers.
      Maoists may have implemented a one child policy, but they long took immense pride in ruling over the most populous country in the world. Like everywhere else, bigger is better. Especially if you are bigger than India, China’s eternal rival.
      Demography in China is a thorny issue and Beijing doesn’t like outsiders sticking their noses in it, just like they don’t like them to take too much interest in their nuclear programs.

    • Chip Javert says:

      I think the theatrical statement “…They are exporting deflation on a massive scale….” is incorrect. Selling unoccupied USA condos to Chinese nationals hardly causes deflation, but it’s probably a gross misallocation of Chinese capital.

      How does this increase USA capacity of anything except empty condos? How does overpaying for condos lower prices? To the extent Chinese are financing these purchases, unwinding them could get messy. My anecdotal understanding is some/most purchases are for cash (i.e. a mental form of money laundering). Seems to me the Chinese are exporting a grave distrust in their own money.

      • Petunia says:

        In the last couple of days I have been reading about defaults and price cuts in the New York City luxury market. This is a market saturated with Chinese money. They have inflated the real estate market to the breaking point. That’s when the deflation starts. Now they have all these new buildings with no buyers. Once NYC goes, next is San Francisco and the rest.

  3. MC says:

    Well, I can tell you for certain Chinese demand for European goods took a massive hit in 2015: apart from, intriguingly enough, drugs, all sectors are in the deep red.
    Of particular concern are German car exports to China, down 26%. Now: all car manufacturers have factories in China, some of them churning out cars simply to justify their existence and to give CEO’s something to brag about, but the prime products, those the big spenders in China truly want, are manufactured abroad. Just to give an example since 2010, 45% of the BMW 7-series sedan manufactured were earmarked for the Chinese market, the prime one for this family of cars by a fair margin.
    Intriguingly enough, production figures for the 7-series follow very closely freight traffic in China. Production peaked in 2011, slightly contracted in 2012, stagnated in 2013 and started swooning in 2014. Mere coincidence? As Leonardo Da Vinci is often quoted as having said “Learn as everything is connected”.

    • CENTURION says:

      All those Chinese car manufacturers can ship them to the US and Wal-Mart can finally start selling cars at Sam’s Club.

      Buicks for $10,000? Your choice in Red, or White, or Blue. 1% Financed on your Sam’s M/C Card. Plus, you get your 2% Sam’s rebate…..AND, that’s not all, you get a $100 Gas Card, and free Baby Wipes for a Year!!!

      Bye, Bye UAW.

      • MC says:

        I know you are joking, but they’ve already tried that.
        In 2007 Chery struck a deal through its European subsidiary, DR Motors (thus named due to a lawsuit from GM), to sell cars through French and Italian big box stores.
        And it was a disaster: the price may have been low, but it wasn’t that low, and post-sales was difficult, as Chery had not formal dealership network and relied on a network of independents which looked like an albino Dalmatian: lots of missing spots.

        The only Chinese firm to achieve some measure of success was Great Wall Motors, and only because they sold pickup trucks for cheap, much cheaper than the Isuzu’s and especially Toyota’s which are standard fare here.
        But after the novelty wore off, it was soon apparent there was a very good reason these trucks were so cheap.
        People buying trucks here don’t do because it’s fashionable. They buy them to work and expect them to last. The new Mitsubishi’s are already becoming unsellable because word is spreading they are neither reliable nor particularly well put together. Word of mouth spreads fast.
        The Chinese trucks were soon branded as cheap and nasty, and sales went down the drain accordingly. To limit the damage now they sell SUV’s, which I am sure will do well as people buying those things just want something big, cheap and with a small engine (fuel prices, road tax and insurance make sure of that).

  4. Tyler from Grand Rapids says:

    Don’t worry Wolf, I’m sure all the app development and real estate investment will pick up the slack, so negative with those statistics and facts of yours :P

  5. Michael Gorback says:

    And they’re exporting their deflation to the rest of the world, which is currently trying to reflate.

  6. NotSoSure says:

    Demographics is a double edged sword. Sure people are getting older but if people have the money, there should be an increase for services catering to older people, etc.

    The problem here in the end is the same as the West or pretty much everywhere else. Entrenched interest. Some companies (including State Owned ones) become too big and they either crush innovation or become TBTF. There should a limit to how big a company can grow.

    • Mark says:

      To limit company growth, nonsense.
      On contrary it should be encouraged, because it leads to job creation and expansion of consumer base (economy).
      Number of Government service employees should be limited and all new job creation should be non union so system is purged over time from these parasites.

      • NotSoSure says:

        Seen reality much? Small companies contribute more to job creation.

        What you are repeating is the same neo liberal nonsense. Next you’ll be claiming that the Internet was invented by the private sector.

        • Mark says:

          Big corporations employ about 75% of work force in USA.
          Need more?
          So why all pain and talk when big companies outsource jobs offshore? Let me tell you why; small companies pay small salaries, peanuts.
          Need more?
          You BS about politicians and look who’s word you you take from Forbes.
          Need more?

      • OutLookingIn says:

        Mark –

        From the Small Business & Entrepreneurship Council;
        Businesses with less than 20 workers make up 89.6 % of the economy.

        Very large companies (those with 500 or more workers) make up a small percentage of the economy. Small businesses are the backbone of the economy.

        • Mark says:

          Are you on dope.
          Government jobs
          Banks and insurance companies
          Auto industry
          Teck companies Apple, Google, Amazon, etc.
          Hotel and service industry
          Transport air, rail, road sea.
          Etc. etc.
          In your village it is maybe 89% but the rest of America is other way around.
          And that link is very credible place to get info.

        • Wolf Richter says:

          OK, let’s look at some interesting facts.

          You listed the auto industry as a big company employer. So here is the industry:

          Auto manufacturers (big companies and smaller suppliers too) employed 920,000 people in March.

          Auto dealers employed 1,991,100 people. Parts dealers employed another 1,282,300 people. Combined, the auto retail trade employed a total of 3,273,400 people – far more than the big manufacturers.

          This doesn’t include insurance agencies and all the other small employers in the industry.

          Here’s some data from payroll processing company ADP:

          large employers (1,000+ employees) created 18,000 jobs last month. All other companies combined (the smaller and very small employers) created 182,000 jobs.

          If the definition of a large employer is 500+ employees, the “large” companies combined created 39,000 jobs, and the rest of the smaller companies created 161,000 jobs.

          You see, smaller companies ARE the big job creators in the US. They’re the unsung heroes.

      • CENTURION says:

        AND all immigration STOPPED. ALl

  7. Keith says:

    I can assure you we are not very happy either in China’s Central Planning Office.

    We were told by Western economists that supply creates its own demand.

    We’ve got loads of supply and no demand.

    Would those Western economists like to explain?

    Your very silly, supply side economics creates loads of supply but does nothing on the the demand side of the equation.

    No wonder we never used to trust the West, it is full of imbeciles.


    Disgruntled of China

    • Zoo Keeper says:

      Take your low quality, faulty sh**t and shove it up yours.
      We don’t need that kind of supply. I wish to be able to purchase again Made with Pride, all said.

    • Chris says:

      Supply side economics is nothing short of bunk. It “works” only to the extent that goods can be produced cheaper and cheaper. To fulfill this end jobs are exported to low wage emerging economies and the products are exported back to developed economies. Of course, this results in the following messy question: If jobs are exported from the US then what happens to the required disposable income needed to buy all this neat crap? Answer: Just have the American public go further into debt. Wow! What a great idea!! That will surely boost stock prices and allow the executives with stock options and stock market speculators the opportunity to cash in before the bubble bursts. Of course, main street Americans get screwed. Well, at least the Chinese are getting a taste of it now. I recently read on this site how companies that were previously based in China have relocated to South East Asian countries due to increased wage demand in China. Ironic to say the least.

      • Keith says:

        Supply side economics works and it does what it says on the tin.

        After four decades of supply side economics, chronic over-supply with almost no demand.

        All the money is at the top with no investment opportunities.
        All the debt is at the bottom and the repayments have destroyed the consumers purchasing power.

        A savings glut at the top and a debt glut at the bottom, sapping demand through repayments.

        The rich can always purchase pretty much what they want and further capital is just money looking for investment opportunities.

        When those at the bottom get more money they spend it into the economy and increase demand.

        US firms can’t think of anything else to do accept engage in share buybacks.
        Why invest when demand is so subdued?

        There is lots of money about but it’s all in the wrong places.

        What numpty said Capitalism trickles down?

        Money trickles up, debt trickles down.
        Money pools at the top, debt pools at the bottom.

        The market for subprime mortgages; subprime auto loans and payday loans is saturated I am afraid.

        Oh dear, it looks like secular stagnation.

    • Chip Javert says:

      Disgruntled of China:

      Yup; definitely agree supply-side economics will not work with what amounts to slave labor. People tend to behave differently when they’re free.

    • CENTURION says:

      Ah, grasshopper….to create demand, create YUAN. Celestial dropping of YUAN from GOLDEN Heaven, upon the peoples of the nation, will, child, create Imperial Illustrious Demand.

    • Wolf Richter says:

      LOL …. this is hilarious. Made my day!

      • Mark says:

        I don’t agree with you on small business.
        The way you people look at definition of small business is ridicule.
        If you apply that formula than McDonald is small business too, because franchise outlets hardly employ over 20 people each.
        You have to see big picture.
        Same with auto dealers GM, FORD and all others no mater how small they are part of much larger corporation, not to mention parts supply and everything else.

        • Wolf Richter says:

          I think you need to try to understand the franchise system. The guy who owns a Ford or Chevy dealership (the “dealer”) is most decidedly not part of the manufacturer. Nor is the corporation he owns (“Jerry Smith Ford,” for example). If it doesn’t make it, it goes bankrupt. The manufacturer doesn’t blink and just hands the right to sell its cars (the franchise) to someone else.

          Most states don’t even allow auto manufacturers to own their own dealerships, though recently, states have become more flexible as Tesla is trying to set up shop. Tesla is unique in that it owns all its stores. But it’s still not allowed in all states to open its own stores and hence doesn’t have stores in those states.

          States regulate the auto franchises heavily. There are a lot of car dealers, and they have a lot of political power, and they got states to protect them … against the manufacturers!

        • Mark says:

          Hey W
          Owning franchise was the biggest drain of time and money I ever experienced.
          Yes, they don’t care if you go bely up but you are still regulated by them. Royalty, advertisement, rent, number of employees etc.
          It was just pain in the a** I could barely make ends.
          I was not independent in any way but ruled by the big corporation (in my case Second Cup coffee shop – part of Cara corporation). It is same more or less with any other franchise.
          Any way thanks for chat.

  8. ERG says:

    Dear Disgruntled of China,

    Central Planning is an oxymoron.

    Ludwig von Mises

    • Darrow says:

      “Central Planning is an oxymoron.”

      You’re viewing a website whose focus, if not fixation is on pointing out that market forces and even the market itself has been so distorted by manipulation by central banks and political matters that it can no longer be used as a proxy for measuring the forces of supply and demand.

      That is not a Chinese creation, but something that can be traced back to the USA. Hence our distorted demand market is what they’re supplying!

      Should the Chinese stop ‘central planning’, I see no real market to take its place. In that context your link has no relevance. Should they stop, it will be akin to lighting a fuse and waiting for the bomb to go off.

      • ERG says:

        It has plenty of relevance. EVERYONE needs to stop.

        Central Planning is traceable to the USA? Does your economic history book only go back to the 1940s ?

  9. unit472 says:

    This can be fixed by simply shooting a few railroad managers. Those promoted to take their place will learn how to produce required freight loads even if means just hauling dirt back and forth instead of coal.

  10. CENTURION says:

    Solution? Easy. I think it is about 7-8 Yuan to the Federal Reserve Note today?

    Change that to 10 Y to 1 FRN. That will boost exports like a whirlwind

    Next, redact the latest “official numbers” for seasonal adjustments, cpi indexing, un-recorded expenses and one can easily make the amounts GREATER than the past.

    What is the point in being a Commie dictatorship if you can’t dictate.

    When in doubt, LIE. Damn, these Chinese have a lot to learn about Western accounting.

  11. Shawn says:

    I think what a lot of people don’t realize is that the Chinese are incredible savers, Japanese as well, always have been. And when they are not saving, they invest in property. There will never been a much anticipated consumer led consumption revolution in China as you have here in the US. Americans live pay check to pay check, the Chinese don’t. All this talk from the corrupt corporate media here about China shifting from an export led economy to a consumption one is just talk or wishful thinking.

    • Keith says:

      When there is almost no welfare state you need to save for a rainy day.

      Pension provision is optional for employers in China and it is obviously cheaper not to provide it. More saving required.

      Doesn’t explain Japan though, I think it has quite a good welfare state.

      Anyone know more?

      • Nicko says:

        China’s in deep trouble with their aging population, the FT video posted here the other day was a great example.

  12. Paddy Jim Baggot MD says:

    in WWII in Japan
    they could not admit to tokyo when they were losing a battle
    they would radio back to tokyo they were winning when they were losing
    Tokyo would then amplify a defeat into a disaster

    if no one is honest in China
    it will turn out worse than it needs to

  13. Roland says:

    I wonder how much of this is due to a drop in demand for coal and a rise in LNG? We’ve seen some pretty big drops in US railcar loadings as coal-burning power plants shut down. And then there’s coal demand from Chinese steelmakers, also plunging.

    • Wolf Richter says:

      Yes, the Chinese New Year causes huge distortions in their numbers (in addition to all the other distortions). So you always have to look at the months around Chinese New Year together. This year, it means February and March, and probably the whole first quarter, to go beyond the New Year’s effect.

      Exports in the first quarter were down sharply, but they didn’t collapse quite as badly as February figures made it seem.

      • Thomas Malthus says:

        It would be useful to have an apple – apple comparison…. last year’s CNY numbers and post CNY numbers vs this year….

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