A “hard landing” would be tough for China. But it would still mean economic growth, if very slow growth by Chinese standards. At worst, it would mean stagnation. But now, evidence is piling up that the economy is actually shrinking.
There is practically universal agreement outside official Chinese reporting that the economy hasn’t been growing at anything near the official and for most countries awesome rate of 7% in the last two quarters.
In the US, we don’t know what our quarterly GDP growth is either. We get the first estimate, which may be negative, and then the second estimate, which may be worse. Then the third estimate may suddenly be positive, by which time people stopped paying attention. GDP continues to be revised years later. It’s tough to measure a big economy.
But China doesn’t even revise its GDP growth number. It comes out shortly after the quarter ends and stands as rock-solid as the Communist Party itself. And it always matches or exceeds the decreed target.
Hence no one believes it.
Yang Jian, managing editor of Automotive News China, who has been fretting about plunging auto sales, put it this way:
[E]ven some Chinese government officials remain wary of the reliability of economic data released by the National Bureau of Statistics.Li Keqiang, now Chinese premier, was one of them. When he was head of the local communist party in northeast China’s Liaoning province ten years ago, he invented his own method of gauging the national economy’s performance by relying on three variables government statisticians cannot easily inflate – electricity consumption, rail cargo volume, and bank lending.
Li’s economic model has been widely adopted by researchers these days. In the first half of the year, except for bank lending, electricity consumption and rail car volumes across China both declined….
So how bad is the economy?
If bank lending, the only still growing element of the three, is focused on throwing more money at zombie companies to keep them afloat, on bailing out toxic debt by replacing it with even more new debt, and on creating even more overcapacity and empty buildings that will never earn the returns to service the debt, well, then it’s not adding to economic growth in a sustainable way either.
This is how New York Times reporter Michael Schuman described the now failing industrial principles of China via cement maker Lucheng Zhuoyue in Changzhi, a city of three million people:
Changzhi and its environs are littered with half-dead cement factories and silent, mothballed plants, an eerie backdrop to the struggling Chinese economy.
Like many industrial cities across China, Changzhi, which expanded aggressively during the country’s long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth.
But rather than shut down, Lucheng Zhuoyue and other Changzhi companies are limping along in a kind of march of the undead.
They’re losing money. Customers are disappearing. Yet, these already over-indebted companies are borrowing even more to stay afloat and keep going.
“If we ceased production, the losses would be crushing,” Lucheng Zhuoyue’s general director Miao Leijie told the New York Times. “We are working for the bank.”
With ghost cities and unneeded factories dotting the land, construction projects have been scaled back, and demand for cement has collapsed. Hence rampant overcapacity.
A couple of years ago, the new government pledged to restructure the economy, weed out overcapacity, take the losses where necessary, and transition the economy to high-value manufacturing, innovation, and services. Companies would be allowed to fold. And their debts would be allowed to default.
But when economic growth spiraled down, reform efforts stopped. Now the government and its state-owned megabanks keep these companies alive by rolling over their debts, restructuring loans, and extending new credit and other aid to keep the old debt from blowing up.
Good for a vibrant economy? Not so much. And the banks that extended these now toxic loans?
The four largest state-controlled megabanks, after years of double-digit profit growth, have reported almost no year-over-year profit growth in Q2, with the best performer being Bank of Communications at 1.5%, the Wall Street Journal reported. A sign that banks are starting to account for some fragments of the massive toxicity hidden in their loan books:
Now, trophy investments in largely empty municipalities known as ghost cities and oversupplied infrastructure aren’t delivering promised returns. Meanwhile, debtors face overcapacity in several industries and slower demand, while land sales are hit by a weakened property market.
This entire system, a dominant part in the Chinese economy, and now in turmoil, hasn’t entered the officially decreed GDP number. And there is another big measure that shows just how fast the economy is slithering into trouble: new vehicles sales.
The auto industry in China impacts the economy in multiple ways, from industrial production, finance, and services to retail sales. Only a small fraction of vehicles are imported. The rest are manufactured in China.
New passenger-vehicle sales in China had a positive correlation with economic growth: sales were growing slightly faster than official GDP, year after year, according toAutomotive News China. For example in 2014, new passenger-vehicle sales, which were already slowing, grew 9.9% while the overall economy officially grew 7.4%.
But now that correlation has reversed.
New passenger-vehicle sales, though already trending down, were still growing 9.4% year-over-year in Q1, according to the China Association of Automobile Manufacturers. Then they began to sag. In April, sales grew only 3.7%, in May 1.2%. In June, sales actually fell 3.4%. In July they plunged 6.6%!
Either auto sales have by sheer magic decoupled from the economy, or the official 7% GDP growth is a political delusion, and the economy isn’t just slowing down further to a growth rate of 6.5% or 5%, or even a “hard landing” with a growth rate of 2% or 1%, or even a flat quarter, but is actually shrinking.
That’s what hard-to-fudge measures such as auto sales are saying.
Automakers, like cement makers before them, are responding with production cuts and a price war. And there is no relief in sight, as SAIC, partner of GM and Volkswagen, and China’s largest automaker, warned: “the domestic market situation in the second half of the year remains grim.”