Forward-looking gauges of consumer confidence are rising at the fastest rate since 2007 in China as output picks up on almost every front
By Ambrose Evans-Pritchard
6:16PM BST 18 Jun 2015
Apartment buildings are seen behind a the ancient gate outside a temple in Beijing, China. Photo: AP
China’s housing market is roaring back to life in the biggest cities while local governments are issuing bonds at a blistering pace, the latest signs that the world’s second largest economy is finally pulling out of a deep downturn.
Output is picking up on almost every front as the effects of credit easing begin to feed through, with the ‘expectations’ component of consumer confidence soaring to the highest level since the glory days of 2007.
Rail freight, electricity use, and even sales of diggers and earthmovers are all recovering at last from recessionary levels.
The apparent inflexion point has major implications for the world’s commodity markets and for struggling resource economies in Latin America and central Asia that depend on feeding the dragon.
The China Activity Proxy published by Capital Economics – deemed more accurate than the official GDP data – suggests that the underlying growth rate slowed to 4pc in the first quarter.
This was the slowest pace since the 1990s, excluding the brief episode of the SARS epidemic in 2003.
The economic cycle has now clearly turned as authorities step up stimulus, clearly worried that efforts to clamp down on the shadow banking system and rein in excess debt may have gone too far for comfort.
The crucial shift is an expansion of the country’s debt swap plan, intended to clean up the Augean Stables of China’s local government finances. The regions have switched from bank lending to bonds, issuing $65bn in the first two weeks of June alone.
Mark Williams from Capital Economics said frees up borrowing for other purposes, even if the extra lending is disguised. “The value of these bonds is not included in the central bank’s measure of total social financing,” he said.
Fresh data from the National Bureau of Statistics showed that home prices in the “tier I” cities jumped 2.8pc in May, the largest one-month rise in over five years.
Property continued to lag in the rest of the country – with a glut of 4.3m unsold units still hanging over the market - but prices have at least stabilized after sixteen months of declines. The sharp contraction in sales earlier this year has given way to a new burst of optimism, with transactions up 15pc in May.
Bo Zhuang from Trusted Sources said the government’s attempt to navigate a “controlled slowdown” nearly went awry earlier this year as curbs on local government spending led automatically to fiscal tightening – what some called a “fiscal cliff”.
Cuts in the reserve requirement ratio – the central bank’s pain policy tool – merely offset the contractionary effects of record capital outflows. They did not add extra stimulus.
The result was an ugly squall, with a crash in fixed investment and several months of outright contraction in industrial output. It amounted to a minor shock that sent ripples the world. Lombard Street Research estimates that China’s real domestic demand plunged by 2.1pc in the first quarter.
Bo Zhuang said Beijing has now pulled a set of stimulus levers, reverting to the same ‘stop-go’ pattern of past years. The benchmark market lending rate (7-day repo) has dropped abruptly from 5pc to 2pc, flushing the market with liquidity.
The country is still in the grip of powerful deflationary forces, with excess capacity in steel, cement, chemicals, and swathes of manufacturing. Factory gate inflation remains stuck at minus 4.6pc and has been negative for 37 months.
Yet there is little doubt that the Communist Party has blinked once again, putting off the day of reckoning. “They want a correction without actually having to go through one,” said Patrick Chovanec, a China veteran at Silvercrest Asset Management.
Beijing is winking at a vertiginous stock market boom that has lifted the Shanghai composite index by 150pc over the last year, fuelled by margin debt that eclipses even the final blow-off phase of the Wall Street bubble in 1929.
Mr Chovanec said China’s leaders are now in much the same position as Japanese officials in the early 1990s when they discovered that it was already too late to escape the consequences of a credit bubble and systemic over-capacity.
“In the end, they will have to turn on the fiscal taps to prevent a collapse of GDP, just like Japan,” he said.
This was the slowest pace since the 1990s, excluding the brief episode of the SARS epidemic in 2003.
The economic cycle has now clearly turned as authorities step up stimulus, clearly worried that efforts to clamp down on the shadow banking system and rein in excess debt may have gone too far for comfort.
The crucial shift is an expansion of the country’s debt swap plan, intended to clean up the Augean Stables of China’s local government finances. The regions have switched from bank lending to bonds, issuing $65bn in the first two weeks of June alone.
Mark Williams from Capital Economics said frees up borrowing for other purposes, even if the extra lending is disguised. “The value of these bonds is not included in the central bank’s measure of total social financing,” he said.
Fresh data from the National Bureau of Statistics showed that home prices in the “tier I” cities jumped 2.8pc in May, the largest one-month rise in over five years.
Property continued to lag in the rest of the country – with a glut of 4.3m unsold units still hanging over the market - but prices have at least stabilized after sixteen months of declines. The sharp contraction in sales earlier this year has given way to a new burst of optimism, with transactions up 15pc in May.
Bo Zhuang from Trusted Sources said the government’s attempt to navigate a “controlled slowdown” nearly went awry earlier this year as curbs on local government spending led automatically to fiscal tightening – what some called a “fiscal cliff”.
Cuts in the reserve requirement ratio – the central bank’s pain policy tool – merely offset the contractionary effects of record capital outflows. They did not add extra stimulus.
The result was an ugly squall, with a crash in fixed investment and several months of outright contraction in industrial output. It amounted to a minor shock that sent ripples the world. Lombard Street Research estimates that China’s real domestic demand plunged by 2.1pc in the first quarter.
Bo Zhuang said Beijing has now pulled a set of stimulus levers, reverting to the same ‘stop-go’ pattern of past years. The benchmark market lending rate (7-day repo) has dropped abruptly from 5pc to 2pc, flushing the market with liquidity.
The country is still in the grip of powerful deflationary forces, with excess capacity in steel, cement, chemicals, and swathes of manufacturing. Factory gate inflation remains stuck at minus 4.6pc and has been negative for 37 months.
Yet there is little doubt that the Communist Party has blinked once again, putting off the day of reckoning. “They want a correction without actually having to go through one,” said Patrick Chovanec, a China veteran at Silvercrest Asset Management.
Beijing is winking at a vertiginous stock market boom that has lifted the Shanghai composite index by 150pc over the last year, fuelled by margin debt that eclipses even the final blow-off phase of the Wall Street bubble in 1929.
Mr Chovanec said China’s leaders are now in much the same position as Japanese officials in the early 1990s when they discovered that it was already too late to escape the consequences of a credit bubble and systemic over-capacity.
“In the end, they will have to turn on the fiscal taps to prevent a collapse of GDP, just like Japan,” he said.
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