‘Bad news’ seems to have become ‘good news’ as far as China’s economy is concerned. In the past, most analysts simply ignored the possibility of a major slowdown. Now that the slowdown is underway, they still ignore it – this time, because they are sure further stimulus is just around the corner.
But time passes, and the lending data still points in a downwards direction, as the chart above shows:
- Shadow lending is now just a quarter of total lending, less than half the previous ratio (red area)
- This was the area the government wanted to squeeze, as it had created the property bubble
- Official lending has been maintained at previous levels, but not increased (green)
- This is essential as the government needs to keep liquidity in the banking system
Ironically, the analysts are in fact right, for the wrong reasons. It is actually very good news that China has stopped trying to create ‘wealth effects’ via stimulus and an unsustainable property bubble. As the editor-at-large of China Daily explained recently:
“Here’s why Chinese banks are reluctant to lend even though the central bank has cut both the interest rates and banks’ reserve requirements: Their clients－mostly those on the corporate level－are besieged by more and more difficulties in the market and are less and less able to pay back their borrowings Local housing developers cannot sell all the apartments they have built.”
A new investigation by the New York Times confirms his conclusion:
“Despite recent signs that housing prices are stabilizing, a backlog of unsold homes and unleased shops means that builders simply are not doing much building“.
China’s construction market came to dominate the economy under the stimulus programme. Now other key data are confirming the slowdown, with electricity consumption up just 1.6% in May, as the chart above shows. This takes us back to the pattern in early 2009, before the stimulus programme began to have its full impact. And it reflects the policy statement made at the end of 2014:
“China’s economy has entered a “new normal” of slower but higher-quality growth. From top leadership to small-business owners, the “new normal” status has become the new consensus.
“The popularity of the catchphrase marks a shift in mindset of the Chinese people – lower growth is likely to continue for a while and is not a sign of failure, but a lack of reform can be fatal to long-term sustainable growth. For policymakers, they are less worried about missing official growth targets, but rather hold fast to the belief that giving up growth spurts for stringent reforms will eventually pay off.
“A nationwide acceptance of and disenchantment with growth figures will help build a stronger economy — slower growth but lower unemployment driven by innovation and services industry, compared with high growth and high unemployment in an economy led by investment and exports in the past.”
China’s new leadership made it clear on taking office that they would not continue with stimulus policies. They knew they had to change course, and move away from the investment and export-led focus of the past. But most analysts have continued to wear their rose-tinted glasses and have ignored the changes underway.
It may be a painful awakening, when the reality of China’s New Normal policies finally forces them to accept this has been wishful thinking.