Don’t say we never do anything nice for you. We found four positive signs this week, and while at least three of them might raise more questions than they answer, China bulls should probably just enjoy the moment.
1. New loans data for August looks positive
As we wrote over here, new renminbi loans for August were a lot higher than expect and much higher than July. And the proportion of medium to longer term loans apparently grew a wee bit.
The government’s preferred measure of credit, total social financing, certainly looks improved on July.
None of this is very impressive if you look back further than a few months, but more longer-term lending in itself is a positive and has been seen as a sign that the central authorities are succeeding in getting more credit growth.
2. Anecdotally, some people are less worried and new orders are possibly perky
Stephen Green, Standard Chartered’s China economist, says the sentiment is better than you might expect:
[W]e report on some of the conversations we had in Shanghai last week with corporate clients – again a mixed bag, but the “weak-but-stable growth” story dominated the “deteriorating-and-I’m-really worried” one.
That’s the synthesis of comment from meetings with about a dozen corporate clients across both consumer and industry sectors, and four bankers. (More details in the usual place.)
Some positive chatter also reached Dong Tao of UBS, who popped this into the end of a mostly negative appraisal of China’s economic data yesterday:
Meanwhile, in our recent trip to Dongguan, Guangdong, one of China’s export hubs, manufacturing exporters indicated that orders have picked up in the past weeks after a very bad July and early August. Exporters suggested that the pace of orders have picked up by at least 20% from a month ago, though the volume is still below what was seen the same time last year. August and September are critical times for Christmas orders. The late arrival of orders from US and emerging markets is good news for the exporters, although none of them know if the recent pick up can be sustained. A similar trend has been reported by Taiwanese electronics producers, who produce a large part of their products in Guangdong as well. It is a little too early to call a turning point, but this is an interesting new development that has yet shown in the statistics.
3. There are some tentative signs in the August data of stronger industrial and consumption activity
Green’s own preferred economic activity indicators are showing a mixed picture. He likes to monitor cement production as opposed to steel, because it can’t be stored and therefore isn’t subsceptible to stockpiling, drawing down, and being used as collateral.
As you can see from the faint green line, cement production is showing signs of life:
Green also says refined fuel products — particularly diesel and gasoline — are a better gauge than the popular electricity statistics. Those, however, show a mixed picture:
Green says gasoline reflects consumption – cars and the like – while diesel tends to be more for industrial use. So, this would tend to tell a story of consumption holding up okay — a crucial question if we are attempting to divine the state of imbalance in China’s capital-intensive economy.
However, on reflection, it probably doesn’t tell us much at all.
So, maybe it’s just that China is producing more gasoline domestically and importing less. Update: Actually, Green says the product figures are adjusted for imports, therefore they do reflect level of demand. Oops.
The other reason we can’t draw much of a conclusion from the gasoline/diesel data is that another imperfect indication of consumption — retail spending — appears to be doing worse than fixed-asset investment, according to August data (chart by Nomura):
However, the FAI and retail sales figures are not considered very solid indicators for the consumption vs investment balance. (We explored reasons for this in January, here and here.) Which is why Green uses proxies such as refined product consumption.
But here’s something that complicates that tentative picture of consumption-led growth. UBS’ Tao points out that fixed-asset investment (FAI) growth — which is still in double digits, mind — has not slowed as much as it might appear:
Although nominal FAI growth has slowed, we found that on a real basis growth in July and August (the first two months of 3Q) has actually stayed supported at 20% yoy. This is compared to the 18% YoY recorded in 2Q. This suggests to us that under the national account, gross fixed capital formation (which is in real basis), may not be as weak as the headline FAI suggests.
“China is facing structural problems that counter-cyclical remedies cannot fix,” he said. “The private sector cannot find areas to make enough profit to justify its investment.”
Which brings us to…
4. Property sales are more bouyant
Unlike the other two points mentioned above, there’s data telling a fairly consistent story on this, and it’s a trend that has been visible for a few months now.
A resurgent property market has some advantages, at least in the short-term, for cash-strapped local authorities. And for the vast numbers of people from all walks of Chinese life investing in property — like the overstimulated steel traders who are being chased by banks over bad debts.
And let’s not forget those innumerable souls who don’t want to invest their money in low-to-negative yielding bank deposit accounts or the ailing Chinese share market. Those who are most likely to turn to wealth management products, trustcos, and the like. Much of which — you guessed it — ends up in property.
So if you really want to make the bull case with August data, we suggest sticking with the lending figures.