By John Richardson
CHINA is no longer an export-driven economy. “Eh,” you might well react as you wake up this Monday morning, “has the blog finally taken leave of its senses?”
It is not us saying this, though, but rather China’s government via a statement in the state-run newspaper, the China Daily, in February.
“Exports in 2012 made a negative contribution to GDP growth, and if you deduct speculative funds disguised as trade payments, you’ll find that exports were a drag on growth again in 2013,” said the newspaper.
The chart above underlines how it has been fixed-asset investment, most notably in property and oversupplied manufacturing industries, that have been the primary drivers of GDP growth since 2008. This has, of course, required a dramatic increase in debt.
Thus, one has to question the value of purchasing managers’ indexes (PMIs) in tracking where China’s economy is heading.
John Mauldin, in his latest weekly economic newsletter, makes this point when he writes:
Industry experts often fall into the trap of extrapolating flash manufacturing readings into forecasts for the broader economy.
Our friends at Political Alpha describe one such situation where HSBC’s China team (which puts out the unofficial monthly PMI each month in partnership with MarkIt) “was forced to backpedal from its September 23rd announcement that the flash PMI data was “further evidence [of] China’s on-going growth rebound’ to a much more sombre conclusion just seven days later: “There are still a lot of structural headwinds ahead. This is as good as it gets for the time being…. Don’t expect too sharp an acceleration from here.”
Maudlin, and we agree with him, stresses that he doesn’t want to disparage the efforts of the HSBC team, who, like of all us, sweat-away at the data in an attempt to find out what is really going on.
Instead, he makes this very valid point: “ If anything, this example [of last September’s revision by HSBC of its outlook] is a broader indictment of investors’ widespread reliance on a handful of flawed or misunderstood data points.”
The release of last week’s HSBC flash PMI for May, which represented the highest reading so far this year, should therefore be taken with a large pinch of salt.
The rise in the overall PMI index was mainly driven by a rebound in initial new export orders to a three-and-a-half-year high.
But what about the real value of these exports? We suspect that this recovery has come at the expense of other countries as China, in effect, exports deflation as it attempts to compensate for lower growth at home.
Equal caution should be exercised over reading too much into the rebound in the official government-produced PMI for May. This was also at its highest-level so far this year.
So what data should we be focusing on? Housing data, given that housing has become such a disproportionate driver of GDP.
This analysis, from the Wall Street Journal, is further cause for concern. The newspaper writes that:
- Property sales by value fell 10% in the first four months of the year.
- One reason for the slowdown is the anti-corruption drive. “Government officials and related people used to account for 30% of the buyers,” according to Shih Wing-ching, founder of Centaline Group, a large property agency in Hong Kong and mainland China. “They don’t dare to buy properties now for fear of attracting attention.” This underlines our argument that the housing boom has failed to lift enough economic boats. The government has to, therefore, burst this particular bubble.
- With house prices flat, the number to watch is inventories. Aggressive land buying in the boom years of 2012 and 2013 means more supply in 2014. Inventories in the first-tier and second-tier cities were equal to 14 months of sales volume at the end of April, approaching the high of 16 months hit in February 2012, according to Moody’s.
The longer that this goes on the more the argument will build that China is going to blink. It will not blink, beyond a few relatively modest and carefully targeted measures which will both cushion the impact of rebalancing, whilst also speeding-up reform.