3/3/16: Long-Run China Tops Scary Charts League This Week

The Truly Scary Chart of the week comes not the courtesy of the world of finances, but that of demographics... and no, it is not of the dead elephants of Germany, Italy and the Euro area, but of the (for now much) alive China:

Yes, 2030s are far away, so level declines are yet to come, but rate declines are already here and it is the rate that matters, not so much the level, when it comes to growth.

2/2/16: China Services & Composite PMIs for January: No Signs of Roaring Growth

China Services PMI came in at a surprising uplift in January, reaching 52.4 - the highest reading since August 2015, and up on 50.2 in December. This move was surprising since Chinese services PMI has been deteriorating every month from October 2015.

Per Markit: services “providers had a strong start to 2016, with business activity increasing at the fastest rate in six months. …According to panellists, improved inflows of new business underpinned the latest expansion of services activity.”

As a reminder, the downturn in the manufacturing sector hit Chinese Manufacturing PMI hard with index falling to a 3-mo low in January and staying below 50.0 line of zero growth for 11 months in a row. Details of Manufacturing PMI dynamics are covered in-depth here: http://trueeconomics.blogspot.com/2016/02/1216-bric-manufacturing-pmi-january.html.

On a 3mo moving average basis, China Services PMI stood at 51.3 in January 2016, exactly the same as for the 3mo period through October 2015 and down on 52.7 reading for the 3mo average through January 2015. It is worth noting that the index never dipped below 50.0 in its entire history and the historical average for the index is at 55.1. Current reading is statistically significantly below the historical average.

Due to substantial improvement in the Services PMI, China’s Composite PMI signalled stabilisation in overall economy-wide Chinese business activity in January, with Composite Output Index registering fractionally above the no-change 50.0 value at 50.1, up from 49.4 in December. However, overall, Composite PMI of China has been above 50.0 in only two of the last 6 months and on both occasions, index readings were not statistically distinguishable from 50.0.

Still, 3mo average through January for Composite PMI stood at 50.0 (zero growth) against 48.9 average through October 2015 and 51.3 average through January 2015. In other words, the economy, judging by Composite PMI might be closer to stabilising, but growth is not exactly roaring back.

31/1/16: China Manufacturing PMI: It's at Recession Levels, Folks

China manufacturing PMI signalled another month of deterioration in operating conditions for January 2016. Per Markit, “with both output and employment declining at slightly faster rates than in December. Total new business meanwhile fell at the weakest rate in seven months, and despite a faster decline in new export work.’

Overall, PMI index came in tat 48.4 in January, marginally up on 48.2 in December 2015, marking 11th consecutive month of sub-50 readings. 3mo average through January 2016 is now at 48.4 against 3mo average through October 2015 at 47.6. Current 3mo average is down significantly on 49.8 3mo average through January 2015. Last time Chinese Manufacturing posted statistically significant expansion (as measured by PMI reading above 51.46 - the statistically significant growth marker - was back in July 2014.

Interestingly, Markit is using very ‘diplomatic’ language in their release, saying that “Production at Chinese goods producers fell for the second successive month in January. Though modest, the rate of contraction was the fastest seen in four months. According to panellists, relatively weak market conditions and fewer new orders had led firms to cut production.” In simple terms, this means that the Manufacturing sector in Chine is not growing slower, but is contracting. Which, of course, is vastly inconsistent with official GDP growth data. Over the last 15 months, Chinese Manufacturing managed to hit PMI >50.0 on only one month. One month. How this can be consistent with an economy growing at 6.9 percent is anyone’s guess.

And Chinese companies are now appearing to be deep in revenue recession too. per Markit: “Weaker client demand led manufacturers to discount their prices charged again in January, thereby extending the current sequence of deflation to 18 months (although the rate of reduction was the slowest seen since June 2015). Lower selling prices were supported by a further fall in average input costs at the start of the year.”

In fact, Chinese Manufacturing PMIs have been now running second worst in the BRIC’s group since July 2015, staying above only Brazil’s - a country that is in an outright recession.

I mean you getting any signs of the 6.8-6.9 percent growth anywhere here? No? Well, in general, Services PMIs are also in a tanking mode, but more on this separately.

2/5/15: China's “Great Leap Forward” in Science and Engineering

Richard B. Freeman and Wei Huang NBER Working Paper No. w21081, April 2015 titled "China's “Great Leap Forward” in Science and Engineering" looks at how over "…past two decades China leaped from bit player in global science and engineering (S&E) to become the world's largest source of S&E graduates and the second largest spender on R&D and second largest producer of scientific papers. As a latecomer to modern science and engineering, China trailed the US and other advanced countries in the quality of its universities and research but was improving both through the mid-2010s."

The paper "...presents evidence that China's leap benefited greatly from the country's positive response to global opportunities to educate many of its best and brightest overseas and from the deep educational and research links it developed with the US. The findings suggest that global mobility of people and ideas allowed China to reach the scientific and technological frontier much faster and more efficiently."

Overall, a nice addition to the body of literature exploring internationalisation of human capital and shedding some light onto a less reported area of this development: the reverse flows of human capital from the advanced economies to emerging markets.


Full link: Freeman, Richard B. and Huang, Wei, China's “Great Leap Forward” in Science and Engineering (April 2015). NBER Working Paper No. w21081: http://ssrn.com/abstract=2593660

29/4/15: China's Debt Pile is Frightening & Getting Worse

Just catching up on some interesting data on China, courtesy of @AmbroseEP, showing debt to GDP ratios for China's real economy:

Now, note that the comparatives are all advanced economies that can carry, normally, higher debt levels. Which makes China's 282% estimated total debt pile rather large.

The chart references as a source data presented in this (see scone chart) http://trueeconomics.blogspot.ie/2015/03/5315-troika-tale-of-irish-debt.html but adjusted to reflect RBS estimates. which pushes McKinsey point for China horizontally to the levels close to Greece.

As someone else pointed out, nominal GDP growth in China is apparently now lower than interest on debt.

Meanwhile number of stock market accounts has gone exponential in recent days - using borrowed money (Chinese residents borrowed over Yuan 1 trillion or Euro150 billion worth of cash to pump into stock markets):

Economy is clearly slowing down in China, with conflicting reports and estimates of 1Q 2015 growth suggesting possible contraction in the real economy and domestic demand. (See http://www.irishtimes.com/business/economy/china-equity-markets-boom-while-economic-growth-stutters-1.2182547).

At the top of debt chain are local authorities: latest official data shows borrowings by the local authorities were up by almost 50% since the start of H2 2013 to c. 16 trillion yuan. Local authorities debt growth accounts for a quarter of changes in overall domestic debt since 2008. Recently, the IMF warned China that the country overall economic debt is expanding at a faster pace than debt in Japan, South Korea and the U.S. grew before the onset of the Global Financial Crisis.

My view: when this pile of Chinese debt blows, things will get spectacularly ugly, globally.

18/4/15: Escaping the Middle Income Trap: Historical Evidence and China's Chances

A very interesting paper from the Asian Development Bank Institute on the topic of the middle income trap (see below) and the debate as to whether China can escape one.

Full paper is available here: http://ssrn.com/abstract=2590289.

In basic terms, when the economy starts at lower income levels, this usually involves increasing productivity in agriculture - often a dominant sector in a lower income economy - which frees surplus labour and makes it available to industrial activities and services. As manufacturing and industrialisation rise, the economy moves into middle income category.

When surplus labour from agriculture moves into manufacturing, its productivity is low, so naturally, the emerging middle income economies are focused on low wage, low productivity and low value-added manufacturing. As income rises toward middle-income levels, wages also rise. In order to continue growing, the economy requires either to increase quantity of inputs (capital and labour) - a pattern of development known as extensive margin, or it needs to increase quality of its economy activity, raise the value added by workers and capital used - a pattern of development known as the intensive margin.

The problem is that for an economy with relatively fixed (in the short run) workforce, attempting to continue growing on the extensive margin is simply impossible. Instead, the economy needs to switch - at some point - toward producing better quality and higher value-added output.

As the authors remind us, this "requires a shift in the types of products that it makes (shirts to computers), in the value or sophistication of those goods (low quality shoes to designer shoes), and/or in the value-added contribution to end products (electronics assembly to chip manufacturing)… These shifts require increases in the sophistication of technology, an educated workforce, and changes in work organization and motivation."


The authors thus investigate "the situation of middle-income economies around the world. Since 1965, only 18 economies with a population of more than 3 million and not dependent on oil exports have made the transition to being high income. Many more have not been able to move beyond the middle-income stage." In simple terms, the authors confirm existence of a significant middle income trap.

By testing "differences between two groups of economies across a range of growth and development variables", the authors find that "middle-income economies are particularly weak in the following areas: governance, infrastructure, savings and investment, inequality, and quality — but not quantity — of education." In other words, to shift from extensive margin growth to intensive margin growth you need serious institutional, communications and social capital.

With this in mind, the authors then turn to China. "While the size of its economy is large, the PRC is still a developing country with a modest per capita income. Only in the late 1990s did it graduate from low- to middle-income status. As it continues to expand, increasing attention is now focused on whether it will become a high-income country like several of its neighbors in Northeast Asia or, instead, whether it will suffer the fate of Latin America and
Southeast Asia by remaining at the middle-income level of development for decades."

Interestingly, the authors find that China "…already has many of the characteristics of a high income country, the key exceptions being governance and possibly inequality." The best way to look at the paper results relating to China is presented in Table 23, where the authors "developed a ranking system based on the medians" for all the drivers that were found to be significant in helping countries escape the middle income trap. "For each
variable, the economy received three points for being above the median, two points for
being below the median but above the median of the median, and one point for being
below the median of the median. The results were summed and divided by the number
of variables for which there were data for each economy."

The result is below (partial table)

The core conclusion is that China does indeed appear to rank well in terms of key drivers necessary for escaping the middle income trap. Should it continue gaining in the near future in terms of all these factors at the same rate as it has been gaining in the past, China will join the club of the rich nations, not only because of the scale of its economy and population, but also because of the average or median per capita incomes.

5/8/2014: BRIC PMIs Signal Some Improvements in Economic Growth in July

Markit released all BRIC PMIs for July, so here is the summary of top-of-the-line changes:

As the above shows, Manufacturing PMIs improved m/m in all BRIC countries, although Brazil remained at levels below 50.0. For Services, PMIs deteriorated in all BRIC countries, and in Russia these remained at the levels below 50.0.

Year on year, Manufacturing PMIs are stronger in all BRIC countries, with Russia reaching into above 50.0 territory in July 2014. Russia PMIs are covered in detail here: http://trueeconomics.blogspot.ie/2014/08/582014-russia-manufacturing-services.html while BRIC Manufacturing PMIs are covered in detail here: http://trueeconomics.blogspot.ie/2014/08/282014-bric-manufacturing-rebound-july.html

Now, Services PMIs. Y/y these deteriorated in Brazil and China, improved in Russia, but remained below 50.0 line, and strongly improved in India.

Combined PMIs-signalled activity:

20/6/2013: China Volcano Blowing Up at Last?

Good title to a research note, as I tell my students in MSc in Finance, does the following things:

1. Captures attention of the reader for the right reason
2. Conveys enough information for the reader to continue reading, but not enough to end up with a feeling that all that needs to be known is already expressed in the title
3. 'Sells' the story without over-exaggeration
4. Commits the story to memory.

Today's 'good title' award is for the folks from Markit, for the note titled "Perfect Storm" - a simple, run of the mill account of the day when Asian CDS markets got bashed on China's end of things:

And while on China, excellent article in the FT today on Chinese steel giant Wisco: http://www.ft.com/intl/cms/s/0/fa98c4e2-d830-11e2-9495-00144feab7de.html

Read and weep... China has managed to perfectly waste a USD586 billion stimulus from 2008. That's a lot of burning of cash, if you ask me.

Here's mid-day CDS wideners by order of magnitude:

And here's yesterday's:

That's 40bps in two days. Whacking-cracking... 

On June 6th, China's CDS were at 91.61 with CPD of 7.71%. Chinatastic...

And with that China is heading for a classic sugar crunch just as the punch run out. Over the last three weeks, China's interbank loans rates jumped from about 3% to over 7%, having hit last week 9.6%.

Someone, dial Bank of Japan, quickly!