Courtesy of Mish.
Via email here is another update from Michael Pettis at China Financial Markets. What follows is from Michael Pettis.
Special points
- Europe is attempting to resolve domestic imbalances by forcing them onto their trade partners. This will end badly, especially for Germany.
- China’s new lending, exports, investment, housing starts and GDP growth all continued to slow in May. Many of the numbers came in well below market expectations.
- This is par for the course. Although we may from time to time get a “pop” in quarterly growth, the overall trend will be for growth expectations to follow actual growth numbers down for many years. China cannot get credit growth under control at anywhere near current GDP growth rates.
- Even though credit growth slowed more than expected, it is still extraordinarily high, especially for the amount of growth it is generating. Total social financing grew in May by 2.3% of GDP while GDP itself grew by around 0.6%.
- The IMF claims that China’s real fiscal deficit is around 10% of GDP. This limits Beijing ability to expand fiscally.
- Although overall unemployment seems stable, unemployment among university graduates continues to be very high. It is early to say but this might have social implications at some point.
Adjustment Derailed
Away from Europe the US continues slowly to adjust but I worry that this adjustment will be derailed by a weaker external sector. Meanwhile Japan is still struggling with its debt burden and seems to have no real way of resolving it except by forcing down the currency and interest rates, both of which mean that household sector is expected to reduce consumption to support the debt burden without, it seems, any corresponding increase in investment.
In China the good news is that the rebalancing process seems to have become more determined than ever before in the past, although as of yet there has been minimal rebalancing at the expense of a significant reduction in growth rates. This I expect will continue to be the case, but European trade policies are going to put additional pressure on China’s adjustment.
How much slower?
The big worry I have had over the past year is that as China moves to rebalance its economy away from its over-reliance on its investment, with the accompanying investment misallocation, the economy will slow much more quickly than even the reformers expected, so scaring Beijing into backtracking. So far, I am glad to say, this doesn’t seem to have happened.
We keep getting surprised on the downside by the growth numbers, but to anyone who understands the way China’s growth model works and who knows the historical precedents, this should in no way surprise. I don’t think China is yet heading towards an economic crash, but I do think that even current growth rates are too high, and sell-side researchers and the various official entities in China and abroad will continue, as they have in the past, to revise their growth numbers downward almost on a quarterly basis.
And because growth will consistently underperform expectations, many members of the Chinese policymaking elite, and their effective allies among the shrinking but still large contingent of China-bulls, will increasingly argue that the economic rebalancing is being mismanaged, thereby putting pressure on Beijing to go into reverse. This is the real risk. There is no way that China can rebalance its economy even at growth rates of 6-7%, and attempts to keep growth above that level will simply mean that it will take much longer for China to fix the underlying problems in the economy, that the costs will be much greater, and that the risk of a disorderly crisis will increase.
Can China spend its way to growth?
Real debt servicing costs are growing much faster than the debt servicing capacity. Clearly this cannot be sustained. There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, who argues in his article (strangely titled “China doomsayers run out of arguments”)….
