By John Richardson
THE economic data on China was very useful yesterday if you had already gone long on oil or US equities.
Both crude and the S&P 500 rallied on positive interpretations of Q3 GDP and industrial production data, which included the following:
- “China’s gross domestic product increased by 7.3% in the third quarter, compared with 7.5% in the previous quarter,” wrote the New York Times. “While that was the lowest quarterly growth since the depths of the financial crisis in 2009, the rate remains the envy of major economies. The economy also continues adding jobs at a good clip, and the currency is one of very few that are still rising against the dollar,”the newspaper added.
- “Chinese Industrial Production rose to 8.0%, from 6.9% in the preceding month. Analysts had expected Chinese Industrial Production to rise to 7.5% last month,” wrote Investing.com.
But if you want to keep your job in the chemicals company that you work for, the above kind of interpretation is of no value.
The first step towards getting the right picture would be to read the above New York Times article in full. It is a good example of the ambiguity and confusion out there, when the author adds: “Chinese inflation is at its weakest levels in nearly five years. Commodity prices are plunging. New home sales are declining. Foreign investment is contracting.” This should set your alarm bells ringing.
But, of course, the last thing that anyone wants when they are making budget projections is ambiguity. How on earth do you plot ambiguity on a spread sheet?
The good news is that the chart at the beginning of our post today offers absolute clarity in where China is heading. It is from JP Morgan’s chief China economist Haibin Zhu, who has revised down expectations for total social financing (TSF) for the whole of 2014 (TSF is the measure for all lending in China’s economy, via both its official and its shadow lenders).
If growth in new credit slows down, in line with his revised forecast, Zhu says that this would be the first year on record that it has done so. Last December, we predicted that credit growth would very probably slow in 2014.
Here is a further reminder of why credit creation is so crucial for understanding what is happening with “real growth” in the economy:
- In January, the Chinese Academy of Social Sciences, a government-run think tank, said that TSF would have to rise by 12% in 2014 if the economy was to achieve its same rate of growth as in 2013.
If you want to keep your job you should, therefore, tell your boss that this must mean that “real growth”is far lower than the headline GDP number indicates. This will help you plan your budget for what remains of Q4.
What about next year? You need to tell him:
1.) It is going to get worse in China before it gets better.
2.) China is at the centre of the Great Unwinding. We are at the beginning of a new global economic crisis.