Fabled transition to a service economy? Forget it.
The export and manufacturing powerhouse of the world, the locomotive –
along with the US – of the global economy, and an indicator of the global
economy itself, disappointed economists once again. The operative word in the
media today is “unexpectedly.”
China has been on an glorious debt-and-stimulus binge for the past
few months. New corporate borrowing shot up to record levels as the People’s
Bank of China opened all valves, and juice rushed through the state-owned
megabanks to corporate borrowers and others all around.
In the first quarter, total debt ballooned by 6.2 trillion yuan (nearly $1
trillion), the largest quarterly jump ever, to a record 163 trillion yuan
($25 trillion), or 237% of GDP, up from 148% of GDP in 2007, according
to some of the more benign estimates. Others peg total debt as high as 282%
of GDP. Corporate debt alone is now estimated at 160% of GDP. But no one
knows for sure. With the Chinese economy, everyone is groping in the dark.
It’s not the debt itself that scares observers, but the speed with which
this debt has ballooned. It’s impossible to invests this sort of moolah this
quickly in productive activities whose proceeds would allow for this debt to
be serviced [read… China’s “Lehman Moment” or Decades of Japan-Style Stagnation?].
Economists thought that this stimulus-and-debt binge would actually perk
up manufacturing, boost services, and end China’s economic malaise, the
extent of which remains unknown because no one, not even the Chinese
leadership, trusts the official numbers according to which the economy grew
6.7% in the first quarter. Inflated as that number may be, it’s the slowest
growth since 2009.
But wherever this money went – overseas real estate and M&A come to
mind – it hasn’t been invested in China in productive activities, and it
isn’t helping the economy:
The official manufacturing purchasing managers index fell “unexpectedly”
to 50.1 in April from 50.2 in March (above 50 = expansion). It was the second
month in a row barely above 50, after seven months in a row below 50. The
median forecast by economists, as polled by the Wall Street Journal, had expected it to rise to 50.4.
And that’s the official number released by the National Bureau of
Statistics. The unofficial number – the Caixin Manufacturing PMI – will
come in a day. It has been even crummier: 49.7 in March, 48.0 in February,
48.4 in January, 48.2 in December…. It has been in contraction mode every
month since February 2015.
But the decline of manufacturing suddenly doesn’t matter in China because the government is transforming the economy into a service economy. It is transitioning the economy away from its reliance on manufacturing, which is shrinking. Services are now the new locomotive. That’s the plan.
But no.
China’s official nonmanufacturing PMI, also released today, tracks not just services but also construction. And it fell from 53.8 in March to 53.5 in April.
The sub-index for services dropped from 53.1 to 52.5. Construction, which is where the stimulus money that stays in China ends up, rose from 58.0 to 59.4 in April. Construction is alive and well, and still a big engine of the Chinese economy, whether or not more ghost cities are needed.
But the sub-index for new orders plunged into contraction mode, down 2.1 points to 48.7 in April; new export orders also plunged 2.1 points to 45.7; orders in hand, though slightly higher than in March, came in at an abysmal 43.6. These are the harbingers of “growth” in the future. And they’re all in contraction!
So how well is China’s transition into services doing? This chart shows that growth of the nonmanufacturing PMI has zigzagged lower for years, from an all-time high of 62.2 in May 2007, via the big dip during the Financial Crisis, to the currently disappearing growth:
The fact that the manufacturing and the nonmanufacturing PMIs both are already weakening despite the enormous stimulus-and-debt binge that the PBoC and the government have orchestrated demonstrates that these easy-money policies have lost their effectiveness in driving economic growth.
The failure of these policies has been visible in export-dependent manufacturing for a while. But now it’s even failing in the ballyhooed transition to services that everyone had hoped would be a raving success. Instead, what do these policies succeed at? Adding to the already insurmountable mountain of debt, a good part of which is now going bad.
And in Hong Kong’s housing market, where part of this Chinese stimulus money ended up, everything is suddenly going the wrong way. Read…. The Hong Kong Housing Bu
But the decline of manufacturing suddenly doesn’t matter in China because
the government is transforming the economy into a service economy. It is
transitioning the economy away from its reliance on manufacturing, which is
shrinking. Services are now the new locomotive. That’s the plan.
But no.
China’s official nonmanufacturing PMI, also released today, tracks not
just services but also construction. And it fell from 53.8 in March to
53.5 in April.
The sub-index for services dropped from 53.1 to 52.5. Construction,
which is where the stimulus money that stays in China ends up, rose from 58.0
to 59.4 in April. Construction is alive and well, and still a big engine of
the Chinese economy, whether or not more ghost cities are needed.
But the sub-index for new orders plunged into contraction mode, down 2.1
points to 48.7 in April; new export orders also plunged 2.1 points to 45.7;
orders in hand, though slightly higher than in March, came in at an abysmal
43.6. These are the harbingers of “growth” in the future. And they’re all in
contraction!
So how well is China’s transition into services doing? This chart shows
that growth of the nonmanufacturing PMI has zigzagged lower for years, from
an all-time high of 62.2 in May 2007, via the big dip during the Financial
Crisis, to the currently disappearing growth:
The fact that the manufacturing and the nonmanufacturing PMIs both are
already weakening despite the enormous stimulus-and-debt binge that the PBoC
and the government have orchestrated demonstrates that these easy-money
policies have lost their effectiveness in driving economic growth.
The failure of these policies has been visible in export-dependent
manufacturing for a while. But now it’s even failing in the ballyhooed
transition to services that everyone had hoped would be a raving success.
Instead, what do these policies succeed at? Adding to the already
insurmountable mountain of debt, a good part of which is now going bad.
And in Hong Kong’s housing market, where part of this Chinese stimulus
money ended up, everything is suddenly going the wrong way. Read…. The
Hong Kong Housing Bubble Implodes