2015-12-18

CBB: Chinese Economy Slows Sharply in Q4; Is Chinese Propaganda Front Running the Recession?

The drop in real estate investment should be causing a major slowdown in the Chinese economy considering all the labor and capital dedicated to the sector. There are some crazy estimates of housing driving 20% or more of GDP growth and while one can quibble with the numbers, the high number reflects how important this sector has been for growth. With real estate investment falling 5.1% year on year in November, and declines in the province reaching as high as 75%, there should be a significant amount of displaced construction labor, as well as pain all the way up the supplier chain. We see this in steel and copper prices, we see it in the investment picture, but the vast middle of intermediate goods is pushing ahead as if nothing has happened. One can only assume the cement and glass, to name two industries, are in the same boat. In fact, these industries are mentioned as among those whose overproduction will be targeted for "annihilation."

Perhaps the call to "annihilate" overproduction is only propaganda. The China Beige Book shows the economy slowing sharply in Q4 (see below). Steel industry insiders were expecting for a massive shut down and bankruptcy wave in early 2016 (see: Chinese Steel Industry "Sliding Into The Abyss"; Chinese New Year Could Bring Mass Bankruptcies). Surplus production is going away one way or another in 2016, so the government might as well get out in front with a big and loud policy to shut production. The government will step in to manage the fallout of what is really a market decision. Instead of failure as the economy slumps, the government will claim great success.

As for that beige book. Bloomberg: China Beige Book Shows ‘Disturbing’ Economic Deterioration
National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012.

...While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.

The survey shows "pervasive weakness," Miller wrote in the report. "The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true."

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