Wolf Richter, Wolf Street
BI
A “hard landing” would be tough for China. But it would still mean economic growth, if very slow growth by Chinese standards. At worst, it would mean stagnation. But now, evidence is piling up that the economy is actually shrinking.
There is practically universal agreement outside official Chinese reporting that the economy hasn’t been growing at anything near the official and for most countries awesome rate of 7% in the last two quarters.
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So how bad is the economy?
If bank lending, the only still growing element of the three, is focused on throwing more money at zombie companies to keep them afloat, on bailing out toxic debt by replacing it with even more new debt, and on creating even more overcapacity and empty buildings that will never earn the returns to service the debt, well, then it’s not adding to economic growth in a sustainable way either.
This is how New York Times reporter Michael Schuman described the now failing industrial principles of China via cement maker Lucheng Zhuoyue in Changzhi, a city of three million people:
Changzhi and its environs are littered with half-dead cement factories and silent, mothballed plants, an eerie backdrop to the struggling Chinese economy.
Like many industrial cities across China, Changzhi, which expanded aggressively during the country’s long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth.
But rather than shut down, Lucheng Zhuoyue and other Changzhi companies are limping along in a kind of march of the undead.
They’re losing money. Customers are disappearing. Yet, these already over-indebted companies are borrowing even more to stay afloat and keep going.
“If we ceased production, the losses would be crushing,” Lucheng Zhuoyue’s general director Miao Leijie told the New York Times. “We are working for the bank.”
With ghost cities and unneeded factories dotting the land, construction projects have been scaled back, and demand for cement has collapsed. Hence rampant overcapacity.
A couple of years ago, the new government pledged to restructure the economy, weed out overcapacity, take the losses where necessary, and transition the economy to high-value manufacturing, innovation, and services. Companies would be allowed to fold. And their debts would be allowed to default.
But when economic growth spiraled down, reform efforts stopped. Now the government and its state-owned megabanks keep these companies alive by rolling over their debts, restructuring loans, and extending new credit and other aid to keep the old debt from blowing up.
Good for a vibrant economy? Not so much. And the banks that extended these now toxic loans?
The four largest state-controlled megabanks, after years of double-digit profit growth, have reported almost no year-over-year profit growth in Q2, with the best performer being Bank of Communications at 1.5%, the Wall Street Journal reported. A sign that banks are starting to account for some fragments of the massive toxicity hidden in their loan books:
Now, trophy investments in largely empty municipalities known as ghost cities and oversupplied infrastructure aren’t delivering promised returns. Meanwhile, debtors face overcapacity in several industries and slower demand, while land sales are hit by a weakened property market.
This entire system, a dominant part in the Chinese economy, and now in turmoil, hasn’t entered the officially decreed GDP number. And there is another big measure that shows just how fast the economy is slithering into trouble: new vehicles sales.
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New passenger-vehicle sales, though already trending down, were still growing 9.4% year-over-year in Q1, according to the China Association of Automobile Manufacturers. Then they began to sag. In April, sales grew only 3.7%, in May 1.2%. In June, sales actually fell 3.4%. In July they plunged 6.6%!
Either auto sales have by sheer magic decoupled from the economy, or the official 7% GDP growth is a political delusion, and the economy isn’t just slowing down further to a growth rate of 6.5% or 5%, or even a “hard landing” with a growth rate of 2% or 1%, or even a flat quarter, but is actually shrinking.
That’s what hard-to-fudge measures such as auto sales are saying.
Automakers, like cement makers before them, are responding with production cuts and a price war. And there is no relief in sight, as SAIC, partner of GM and Volkswagen, and China’s largest automaker, warned: “the domestic market situation in the second half of the year remains grim.”
The start of a tsunami? Read… LEAKED: GM Sees Overcapacity Fiasco in China, Hopes Americans Will Buy Lots of Chinese-Made Buicks
Read more:
http://www.businessinsider.com/china-worse-than-hard-landing-2015-8#ixzz3kUVFYCJg
