So it seems that China's economy, in crisis just a few months ago, is all
better. And so, by extension, is everyone else. As the Wall Street Journal
explains it:
China
Calms Anxiety With Economic Fixes
WASHINGTON -- The world's financial leaders started the year worried about
China's decelerating economy dragging the world into another major crisis.
Now, they are breathing a small sigh of relief.
Finance ministers, central bankers and other top officials gathering here
in recent days said Beijing's moves to stabilize its economy have temporarily
eased global fears tied to the world's No. 2 economy.
"There was not the same level of anxiety," said International
Monetary Fund Managing Director Christine Lagarde.
Uncertainty about China had helped trigger a series of market squalls over
the past year -- prompting finance chiefs from around the world to seek
assurances that Beijing's leaders would get a firmer grip on their economy.
But in meetings of the IMF and World Bank through Sunday in Washington,
officials lauded China's recent efforts and pointed to a calming of global
markets. "There's a lot more comfort now in the ability of China to keep
demand at a certain level that would foster growth," Mexico's Finance
Minister Luis Videgaray said in an interview.
U.S. Treasury Secretary Jacob Lew said a new set of policies unveiled by
China's National People's Congress last month "addressed some of the
core issues, including the very significant challenge of dealing with excess
capacity in their economy."
"There was a broad sense that the policies announced are important,
and there's a broad hope that those policies will be implemented effectively
and quickly," Mr. Lew said.
The IMF remains cautious about China's economic outlook. It recently
upgraded China's growth forecast for this year by 0.2 percentage point to
6.5% as a strengthening service sector compensated for a downturn in
manufacturing. But the Washington-based fund said Beijing's plans to boost
output and overhaul its economy aren't sufficient to address long-term growth
concerns.
To its credit, the Journal does express concern over the means by which
China has stabilized its economy. But that's down in the article's
"journalistic balance" section, while the headline and first few
paragraphs set the overall optimistic (or at least relieved) tone. The casual
reader is thus left with a sense that real progress is being made.
But that's emphatically not the case. All China did was borrow a bunch of
money and spend it, and it's left to the sound money community to figure this
out. Doug Noland in his Credit
Bubble Bulletin of course gets it:
Rather than the bust that appeared likely in 2016's initial weeks, the
first quarter witnessed record Chinese Credit expansion. Friday data showed
Chinese March total social financing jumping $360 billion (led by a surge in
bank lending). This was somewhat less than January's incredible $520 billion
expansion, though it did push Q1 Credit growth above $1.0 TN (historic).
Not long ago Chinese officials had set their sights on reining in rampant
Credit growth. Having clearly reversed course, Credit expanded during the
quarter at a blistering almost 20%. This compares to its recent official
target of 13% and China's GDP target of 6.5-7.0%. In such a circumstance,
what is the prognosis for Chinese currency stability? Uncharted Territory.
Keep in mind that Chinese system Credit ("total social
financing") surged 12.4% in 2015, or almost $2.4 TN - a massive amount
of Credit still insufficient to levitate global energy and commodity prices.
The hard landing scenario - appearing increasingly probable back in January
and February - would potentially see a significant slowing, or even halt, to
the Chinese Credit boom.
Have Chinese officials actually convinced themselves that they've repealed
the Credit Cycle?
And Zero Hedge of course has done in-depth work on this subject. See:
$1,001,000,000,000:
China Just Flooded Its Economy With A Record Amount Of New Debt
When China reported its economic data dump last night which was modestly
better than expected (one has to marvel at China's phenomenal ability to
calculate its GDP just two weeks after the quarter ended - not even the
Bureau of Economic Analysis is that fast), the investing community could
finally exhale: after all, the biggest source of "global"
instability for the Fed appears to have been neutralized.
But what was the reason for this seeming halt to China's incipient hard
landing? The answer was in the secondary data that was reported alongside the
primary economic numbers: the March new loan and Total Social Financing
report.
As the PBOC reported last night, Chinese banks made 1.37 trillion yuan
($211.23 billion) in new local-currency loans in March, well above analyst
expectations, as the central bank scrambled to keep the economy engorged with
new loans "to keep policy accommodative to underpin the slowing economy"
as Reuters put it. This was up from February's 726.6 billion yuan but off a
record of 2.51 trillion yuan extended in January. Outstanding yuan loans grew
14.7 percent by month-end on an annual basis, versus expectations of 14.5
percent.
But it wasn't the total loan tally that is the key figure tracking China's
credit largesse: for that one has to look at the total social financing,
which in just the month of March rose to 2.34 trillion yuan, the equivalent
of more than a third of a trillion in dollars!
And there is your answer, because if one adds up the Total Social
Financing injected in the first quarter, one gets a stunning $1 trillion
dollars in new credit, or $1,001,000,000,000 to be precise, shoved down
China's economic throat. As shown on the chart below, this was an all time
high in dollar terms, and puts to rest any naive suggestion that China may be
pursuing "debt reform." Quite the contrary, China has once again
resorted to the old "growth" model where GDP is to be saved at any
cost, even if it means flooding the economy with record amount of debt.
And to put it all together, the PBOC also reported that the broad M2 money
supply measure grew 13.4% in March from a year earlier, or precisely double
the rate of growth of GDP. This means that it took two dollars in new loans
to create one dollar of GDP growth.
With China's debt/GDP already estimate at 350%, how much longer can China
sustain this stunning debt (and by definition, deposit) growth continue?
So it's not a question of whether everything is back to
"normal," but when it all falls back apart. And that might be
pretty soon. From yesterday's Bloomberg:
It's
All Suddenly Going Wrong in China's $3 Trillion Bond Market
The unprecedented boom in China's $3 trillion corporate bond market is
starting to unravel.
Spooked by a fresh wave of defaults at state-owned enterprises, investors in
China's yuan-denominated company notes have driven up yields for nine of the
past 10 days and triggered the biggest selloff in onshore junk debt since
2014. Local issuers have canceled 61.9 billion yuan ($9.6 billion) of bond
sales in April alone, and Standard & Poor's is cutting its assessment of
Chinese firms at a pace unseen since 2003.
While bond yields in China are still well below historical averages, a
sustained increase in borrowing costs could threaten an economy that's more
reliant on cheap credit than ever before. The numbers suggest more pain
ahead: Listed firms' ability to service their debt has dropped to the lowest
since at least 1992, while analysts are cutting profit forecasts for Shanghai
Composite Index companies by the most since the global financial crisis.
"The spreading of credit risks is only at its early stage in
China," said Qiu Xinhong, a Shenzhen-based money manager at First State
Cinda Fund Management Co. "Many people have turned bearish."
What's interesting about this story is that the unraveling in China's bond
market -- and by extension the rest of its and the world's economy -- will,
when it comes, be a surprise to most people because no one told them that
China's stabilization was a debt-based fiction.
When you borrow too much money it always goes the same way: good times
while you're spending the proceeds and a nightmare when your creditors demand
payment. For 40 years the world has been repeating the same cycle and for all
that time the markets have been enthused by the first stage, only to be
crushed by the second.
One could make the case that the next crisis will be the fault of the
enablers (banks, stock and bond speculators, gullible consumers) and that
they'll just be getting what they deserve.
Unfortunately, in the last group -- consumers -- are a lot of people who
don't deserve to be sucked down with the supposedly more knowledgeable
financial pros. But they always are.