China Northeast in Recession, Unadjusted Nominal GDP Declines; Global Economy on Knife's Edge

I started talking about the potential for a recession in the northeast of China in October of last year and the data shows a full blown recession is underway, even without adjusting for overstated national GDP figures.

The bottom six provinces on this list are Inner Mongolia, Hebei, Jilin, Heilongjiang, Shanxi and Liaoning. Those last three provinces all have nominal GDP decreases from Q2 2014.

The chart below is a calculation using unadjusted nominal GDP data from NBS and the chart above. I calculated the GDP change for each individual quarter, then subtracted the year prior quarter. The number represented is the change in nominal GDP, not the percentage change. Any number above zero is growth, any number below zero shows contraction. Five provinces show a decline in GDP in the second quarter of Q2 2015 from Q2 2014.
Those five provinces are Hebei, Shanxi, Heilongjiang, Liaoning and Inner Mongolia.

In the first half of the year, Shanxi's nominal GDP is down 4.7% yoy; Heilongjiang is down 4.2%; Liaoning is down 1.5%. Hebei is up 1.2%, but that is down from 11.1% growth in Q1. Inner Mongolia is up 1.2% in the first half, but down from 3.6% growth in Q1. Guangdong, Jiangxi, Jiangsu and Chongqing are all growing first half nominal GDP at low double-digits.

This paints a darker picture than exists for the economy, assuming you trust China's GDP figures. If you think overall growth is overstated, real GDP for these provinces is almost assuredly negative. Even if it is only nominal GDP declining, that doesn't help the debt situation.

Why are these provinces in trouble? Nothing to do with the stock market. This slowdown is more than two years in the making and as many as four years depending on the industry. It is largely the result of multi-year lows in coal, oil and steel. These provinces, especially Liaoning, turned to real estate to boost growth when natural resources slowed. Since real estate is ultimately tied to the underlying economy, they are suffering a bust in everything at once.

The big questions are as follows: is the global drop in commodities mostly China related? If this is China related, the next question is, rebalancing or a generalized slowdown that is starting in the higher stages of production? And depending on the answer to that question, the final question is this an internal slowdown or the start of a global recession? Just as northeast China is situated at the earlier stages of production for the Chinese economy, so China is situated at the earlier stages of production for the global economy.

If this isn't a larger business cycle recession, then it fits the rebalancing story. Government policy is causing pain for the industrial economy and it will remain relatively contained. That's an optimistic view that I don't share. Already, Brazil, Canada and Australia are experiencing the fallout from the slowdown in resource demand. Currency markets are being affected by the reversal in China's forex reserves. I don't see how a larger slowdown stays contained, at least for financial markets. If a larger business cycle slowdown is underway, this is the early phase of a major recession in the Chinese economy. If China also represents the higher stages of production for the global economy, the whole world should be worried about what's happening in China's rust belt. See this post on gross output for how the intermediate stages of production, such as manufacturing, are much more sensitive to changes in the economy and serve as leading indicators for growth.

An example of China's impact: The price of iron ore hinges on Hebei
For every nine tonnes of steel produced in the world, one tonne comes from Hebei.

The province has been the largest producer of steel and iron in China for the last 14 years running. In 2013, Hebei produced 188 million tonnes of crude steel and 170 million tonnes of pig iron; it accounted for one quarter of total production in China. To put that into perspective, global steel production was 1.6 billion tonnes in 2013, according to the World Steel Association.

...Beijing’s draconian administrative measures to curb production are meeting fierce opposition in the province. It is not hard to understand why; the steel industry alone accounts for more than 10 per cent of the province’s GDP. It is estimated that the government will lose 40 billion yuan in tax receipts.

But most importantly, if the planned reduction goes ahead (accounting for one quarter of total steel production in the province) 600,000 people stand to lose their jobs. The government estimates social security costs for 600,000 unemployed workers would cost 13 billion yuan a year. This potential cost comes in at a time when the government’s revenue is under pressure from a slowing economy.
When you factor in where commodity prices are situated, with oil right near its 2015 lows and a breakdown in oil prices threatening the high yield debt market in the United States, it is not hard to see the global economy on the edge of a significant slowdown. The IMF was still predicting 3.3% growth for 2015 in July, partially based on rebound in oil prices. It is barely a month later, and what's happening in China and commodities makes me think the 2008 recovery is over. We'll see whose right in the next couple of months.

China: This Time Is Different As Li Visits Rust Bust, Stock Market Boom A Short-Term Solution
China's Northeast In Trouble
Nomura: China Local Debt Risk Map

Heilongjiang Oil Field Depression; Firms Shut Doors As Market Forces Begin Reshaping the Industry
Xilin Steel on Verge of Bankruptcy
Economic Trouble in Heilongjiang

Liaoning Sounds Warning on Chinese Economy
Liaoning Housing Market Declines, All Rescue Efforts Fail
Liaoning Fallout; Dalian Yida Rumored Bankrupt, But Govt Twice Denied Filing
In Yingkou, Liaoning Unfinished Buildings Stretch For 50 Square Kilometers; Real Estate Graveyard

In Scamble for Cash, Coal Bosses Dump Real Estate
Second Generation Wealthy Meet Their Waterloo
Natural Resource Dependent Provinces See Tax Revenues Tumble
Shanxi Coal Boss Sells 100 Homes in Beijing; Central Government Work Unit Buys Them All
Coal Mines Become Mine Field for Trust Companies; CCT Steps on Another Mine

No comments:

Post a Comment