fra Fathom Consulting:
The latest reading from our China Momentum Indicator (CMI) suggests that Chinese economic growth could be as low as 2.6%. In a bid to prop up the economy, China’s policymakers continue to reach in desperation for the full range of policy levers, including fiscal stimulus. Nevertheless, there is little evidence to suggest that they have successfully arrested China’s downturn. If anything, their actions risk aggravating China’s non-performing loan problem.
China’s Premier Li Keqiang recently said that the country’s economic growth cannot return to the days of double-digit expansion, though it can stay in a reasonable range. Subsequently, a minimum growth target of 6.5% per annum was set for China’s economy over the next five years from 2016 onward. However, we believe this to be an unrealistic expectation, given that our own measure of China’s economic activity, our CMI, has fallen further to 2.6%.
Our CMI combines rail freight volumes, electricity production and nominal bank lending; all three of which were identified by Premier Li Keqiang as providing a better gauge of economic activity than the official estimate of GDP. Both electricity production and rail freight volumes have weakened markedly, with the latter now at a six-and-a-half year low.
Meanwhile, the final component of our CMI, nominal bank lending, expanded by 15.6% in the twelve-months to October. Even so, this proved insufficient to offset the contraction in shadow-based financing, causing total net lending (known as social financing) to dip to its lowest level in fifteen months.
Despite the lending rate of interest having been cut by 125 basis points over the past year, loan demand has fallen to its lowest level since the PBoC’s Banking Climate survey began in 2004. With profits having slipped, we suspect that there is little incentive for the industrial sector to borrow or invest — regardless of the borrowing cost.
Having reached for the monetary policy levers, and with little obvious traction to date, China’s policymakers have resorted to what they know best — fiscal stimulus. Consequently, nominal government expenditure growth quickened to its fastest pace in nearly three years in October, up 17.0% on a 12 month moving average basis. As we have commented in the past, this approach merely increases the production of spare capacity, worsening China’s non-performing loan problem.
By our calculations, bank’s loss provisions as a proportion of delinquent loans have fallen well below Chinese regulators’ recommended minimum level of 150%. Unfortunately, China’s current strategy does very little to resolve its long-standing problems of spare capacity and non-performing loans.
