“Hard Landing” Ahead, Says China Momentum Indicator


The Chinese stock-market mania has created $6.5 trillion in “value” over the last 12 months. For perspective, that “value” amounts to 63% of China’s 2014 GDP of $10.4 trillion. No other stock market has ever accomplished that much in such a short time. Mainland Chinese have borrowed $348 billion on margin, according to Bloomberg. They want to fire up “value” creation. Everyone is doing it. People are opening new accounts as if there were no tomorrow. And yet, the economy is heading for a hard landing.

Hard-landing gurus have been predicting it for years, and have been frustrated for as long, because there was no hard landing, or even a soft landing, or any landing. China’s economy had turned into a miracle, flying at high altitude, powered by monetary and credit propellants, a construction boom, phenomenal build-out of overcapacity, and strong global demand for its goods.

But now, the magic mix is failing.

China’s exports dropped 2.5% in May year-over-year, after falling 6.4% in April and 15% in March. Global demand for Chinese goods is shrinking overall, with some strength in the US, but falling off sharply in the EU and Japan.

And imports plunged 17.6% in May year over year, after having already plunged 16.2% in April and 12.7% in March. The trade surplus for the first five months has ballooned to a record $217.3 billion.

Something is seriously wrong. The crash in imports was triggered largely by companies curtailing their capital investments, and also by consumers curtailing their spending. They now have more profitable things to do with their money….

It seems every available yuan is being plowed into the stock market, at the expense of the real economy. But stock markets don’t give back the money they “create.” For each person pulling money out of the market by selling shares, there must be someone buying those shares and putting the exact same amount of money into the market. Hence, that $6.5 trillion in “value” that was created over the last 12 months cannot enter the real economy. But by being wrapped up in the mania of the stock market, businesses and consumers, already struggling with other issues, are throttling the flow of money into the real economy.

Nevertheless, the government wants everyone to believe that the economy grew 7% year-over-year in the first quarter, a stellar performance by most other countries’ standards, but China’s worst performance in six years. And likely a bogus number.

Fathom Consulting, which developed the China Momentum Indicator (CMI), reported via Thomson Reuters Alpha Now:

Last week it was announced that May’s official business activity PMI for the non-manufacturing sector in China had slipped to its lowest level since December 2008. It is interesting to note that until early 2013, both our measure of China’s economic growth rate and the official PMI data for the non-manufacturing sector broadly tracked China’s GDP statistics. Since then, the wedge has widened — again calling into disrepute the reliability of China’s official data.

The China Momentum Indicator looks at data from the real economy. And the CMI for April, reported Monday, points at economic growth over the next year or so that could be as low as 2.8%. While that would slightly faster growth in the US than in past years, for China, it’s terrible and problematic.

And the crucial banking sector, under pressure from the government to keep the charade going, is awash in non-performing loans:

Nominal bank lending, one of the three indicators used to create our CMI, rose by just 0.8% between March and April. This is despite a raft of stimulus measures, demonstrating that the People’s Bank of China is struggling to achieve policy traction.

It is not surprising that banks are reluctant to lend when their profit margins are under assault. Just last month, China’s banks were ordered to make loans to local government projects even if the returns to those ventures were so poor that the borrower was unlikely to ever repay the interest or principal loan amount. This will only add to China’s woes, with non-performing loans already estimated by Fathom to be equivalent to around 21% of GDP.

Based on the growing “wedge” between the CMI (yellow line) and official GDP growth (blue line), Fathom estimated that China, in reality, entered a hard landing at the beginning of 2015:

Chinese goods are shipped by container to the rest of the world. But containerized freight rates have become an ugly reflection of reality. Read… China Containerized Freight Index Collapses