China Unbalancing As Recession Hits Services; Industrial Support Courts Disaster

From October 2015: Chinese Recession Ready to Move Into Services. Recessions typically begin in the higher stages of production, such as mining and manufacturing, and spread to the lower stages over time, with retail and consumer sectors hit last. The bigger question, which looks to be answered in the affirmative, is whether as manufacturer to the world, the slowdown in China's industrial sectors heralded a global recession. For now though, those hoping for a services led recovery in China are out of luck.

FT: China’s rebalancing paradox hits home

A recent pledge by government ministries to support industry extolled the sector as “the backbone of the real economy” and “the main battlefield for stabilising the economy”. Infrastructure and real estate — two key drivers of demand for industrial goods — were the biggest beneficiaries of January’s lending boom, which has reportedly continued into February, according to banking sources of FT Confidential Research, a unit of the Financial Times.

Such moves to support industry should not come as a surprise. China has no option but to resuscitate its industrial sector, as FTCR argued last year.

Why? Because China’s industrial-led slowdown is also leading to slower growth in consumer spending and service sector activity.

Here's a look at some companies that make popular brands of snacks, instant noodles and drinks:

No surprise. The FT article goes on to say the slowdown is hindering rebalancing instead of hastening it. This is due to the government still refusing to accept the pain caused by a real rebalancing. It is why I believe the ultimate end game is a massive devaluation in the yuan.

It will also drive the world closer to a trade war. The scenario laid out in The Logic of Strategy: Yuan Devaluation and the Road to Trade War is coming closer to reality with each passing day. The Trump campaign is a nationalist campaign and it heralds the end of existing trade deals. Trade agreements will be renegotiated or scrapped under a President Trump.

MUST LISTEN: Stephen Miller Makes Case Against Marco Rubio in Epic Rant. The key portions are where he talks about sovereignty and opposition to trade deals. Trump will either get better deals on NAFTA and with China, or NAFTA and the WTO will die, to thunderous applause in America.

Debate on Retail Sales in China

First some comments from Christopher Balding on the retail growth in China. The whole piece is worth reading.

Balding: Digging Beneath the Surface of China Data: Retail Sales Edition

If we look at the year to date YOY sales of the top 50 retail enterprises, total retail sales grows by 0.9%. In fact, only one category grows by more than 3%, jewelry which grew at only 4.2%. The short version is that looking at the major retailers of China, there is no evidence to support the official statistics that consumer retail spending is a robust 10.8%.

...There are a few points of economic analysis worth mentioning. First, we pay close attention to GDP and retail sales because we expect them to be good proxies of economic health and activity. However, firms pay with money not official GDP figures. Consequently, even if we stretch credibility and accept official GDP and retail sales numbers as perfectly accurate, firms are not seeing the related cash flow. Second, it appears that the retail slowdown has been much more prolonged than people realize. I present data here that covers revenue growth for the retail industry for all of 2014 showing sales growth of 3.8%. Again, if we believe the official retail sales growth number of 12%, firms live on cash flows and the slow down appears to have begun no later than 2014. Third, this data directly contradicts the entire economic rebalancing story in China. According to the data consumption is simply not outpacing growth in the traditional drivers of Chinese growth such as fixed asset investment. Fourth, this data comes much closer to matching most other data points we have such as consumer output, electricity, freight, and related data. If we ignore the topline official data, none of the underlying and independent data supports a 7% growth story.

He doesn't mention the Internet in there and online sales are a growing factor in China. High commercial rents due to expensive real estate and the shift to online consumption could be a big reason why retail sales numbers don't look good.

Consumer companies seem to confirm Balding's take though.

Chinese food maker Tingyi Q2 profit slides as economy weakens

Tingyi, owner of the Master Kong brand, said profit fell to $90.7 million in April-June, while revenue dropped 6.4 percent from a year ago to $2.55 billion.

For the first-half, profit fell 14.8 percent to $197.7 million while revenue dropped 11.5 percent.

How do sales at major consumer companies fall during a growing economy?

One firm is doing better: Uni-President’s innovative strategy pays off, but:

“We believe more product diversity could help it [Uni-President China] to reverse sluggish market growth [in China],” Credit Suisse’s Taipei-based equity strategist Jeremy Chen (陳建名) said in a report last week.
In addition, lower raw material costs and fading competition with Ting Hsin International Group (頂新集團) — known for its popular Master Kong (康師傅) brand in China — would be important drivers to maintain Uni-President China’s business momentum further, Chen added.

Stock performance hasn't been good for Chinese consumer stocks, but it isn't simply a bear market. Sales have been sluggish for several of the top firms, which points to economic weakness rather than firm specific issues.

Scott Sumner sees the headline retail sales as accurate: China's Retail Boom

Of course just as in America, some of this growth is coming at the expense of brick and mortar firms, and there are indications that sales are flat for many ordinary retailers. But don’t underestimate the importance of online; Alibaba alone now sells more than $100 billion dollars per quarter. If we assume the entire online sector is around $150 billion per quarter, then growth in that sector (year-over-year) is probably on the order of $50 billion per quarter, or $200 billion per year. Thus online growth alone can explain about half of the growth in China’s $4 trillion retail sector.