One of the most talked about macro headwinds for the global economy has been whether China is going to have a hard landing or just slower growth. This topic has been plaguing the market tape since 2011. There’s no question slower growth has affected commodity prices since then. Today, we got a fresh wave of concern over the global growth story with the manufacturing survey data from Markit. Is it a blip or hiccup as some would say, or is it a trend? I think slow growth for China is a trend and here’s why.
China’s flash Purchasing Managers’ Index (PMI) was soft through most of January, at 49.6 from where they were in December at 50.5. The intention of the flash number is to achieve between 85-90% of the total survey responses each month so it’s fairly close to the final number we’ll get at the end of the month just next week. Anything below 50 is attributed to a decrease in economic activity while anything above is expansionary. This is key, because manufacturing has been basically flat for two years, near 50.
Economic activity in China has expanded in the second half of the year every year from 2009, as retailers order for the holiday season; however, manufacturing has inevitably slowed in the first half for the past three years as the retail season ends. This, my friends, is a seasonal trend and not a blip. It has also been fairly normal for manufacturing to slow after the global retailing frenzy at year-end – especially, as China shifts more of its economy towards consumption rather than investment. Don’t forget about the Spring Festival, or Chinese Lunar New Year that will fall after January 31st of this year. Activity always slows at this time and muddies the economic picture.
So that explains some of the seasonality to economic activity, but what about credit? Credit has been tightened over the past four years, likely due to rising real estate values and an economy that has been overheating for a decade. Shibor is the Shanghai Interbank Offered Rate that averages the price quotations from 18 banks on overnight, 1-week, 2-week, 1-month, 3-month, 6-month, 9-month, and 1-year maturities. The charts on the longer rates clearly show how credit has been tightened through higher rates since 2010. They’ve leveled off, but they haven’t been eased to help increase economic activity like the central banks in the U.S. and Europe have.
Shibor Rates
Source: www.shibor.org
The Spring Festival usually tightens credit availability as banks require a lot of cash on hand to satisfy consumer demand. Recently, Shibor 7-day rates spiked on Monday to 6.329%, up 155.3 basis points due to tight liquidity. The rate has been going up ever since the 15th, which is when banks hand in reserves to the People’s Bank of China (PBOC) each month.
Source: www.shibor.org
As a response, the PBOC issued a new Standing Lending Facility (SLF) in an attempt to get more liquidity to small and medium-sized banks. It’s unknown how much was injected, but the rate is currently back down to 5.293% as of 11:30 a.m. Beijing Time. While the PBOC has obviously stepped in here to help banks ahead of the Spring Festival with their short-term liquidity needs, it’s clear from the above charts that they’re happy with where credit rates are further along the yield curve. That is to say, the PBOC likes the status quo—slow growth—and isn’t doing anything to help lower rates and provide assistance to growth, especially with real estate prices rising near 27% in 2013.
We expect China is still running hot in its real estate bubble. They’re trying to ease their way out of it with tighter credit and a slowing economy, but the value of new homes sold in 2013 rose 27% to 6.8 trillion yaun ($1.1 trillion US dollars). The PBOC hasn’t done anything since last March as they try to let each city try to govern their own bubble individually, but as we can see, conditions are still too hot.
China is still growing. GDP was up 7.7% in 2013, a rate most developed economies envy. Recent steel output confirms this growth as crude steel output in China rose 7.5% in 2013 according to Bloomberg News. More recently, December showed a pickup in steel production, up 6.5%, which was the first increase we’ve seen in four months. That should bode well for iron and coking coal producers.
So don’t expect China to have a hard landing. But also, don’t expect the glory days of 13% growth and material stocks with high, double-digit performance. Slow growing China is here to stay as their economy shifts away from investment towards consumption while it continues to fight rising residential prices.
