Takeaway From China's Sept and Q3 Data: Yuan Devaluation Pressure Rising; Next Shoe Drops After IMF Vote

In a nutshell: investment and industrial production are down; the September drop in real estate investment alone requires GDP growth above 8% to achieve the reported GDP figure. Services did boom in the GDP data, but so did credit and new loans. M2 growth tailed off in September and the one month investment figures (RE inv, FA inv) tumbled. If the PBOC turns on the credit spigots again, they create new claims on USD reserves. Growth will come at a price: a depreciating yuan.

Balding: Quick Thoughts on Today’s GDP Release
6. As the ever astute Simon Cox has pointed out, nominal GDP was actually only 6.2% meaning that the GDP deflator turned negative. This is vitally important for a couple of reasons. First, implies the producer price deflation is spreading to the broader economy. Even though officially CPI is still positive at 1.4%, there is significant downward pressure on that number and little evidence that it will be increasing any time soon. Second, this means that revenue or the nominal side of the economy is not nearly as positive as perma-pandas describing. Though the data I have shown here is much lower than 6.2% looking at revenue, this does fall broadly inline with the analysis that nominal growth is anemic. Third, this is all the more worrying for a debt reliant economy. While most people choose to use a debt to GDP ratio to compare whether an economy is facing credit stress, for numerous reasons this is a somewhat blunt instrument. However, if we look at changes in firm revenue and liabilities, we get a disturbingly different picture. Firm revenues for A-shares for instance, have essentially been flat for almost 2 years, but liabilities during that time have gone up by 15% annually and continue to rise at approximately that rate. In other words, the credit problems of firms who must pay in cash not GDP credits, is worsening much faster than the more widely used official debt to GDP ratios.

7. Service growth was boosted enormously in Q2 by the enormous increase in financial services from the stock market bubble. Given the collapse in the Chinese stock market in Q3, by almost any measure such as price level, margin lending, or trading volume, it seems shall we say puzzling that service growth remained so robust.

8. One of the key factors in China’s growth is their decision to simply explode the money supply. M2 growth was more than twice nominal GDP. This is further pushing credit among other issues. One of the many but under explored reasons that explain GDP growth in China is the sheer explosion of the money supply. Next to serial inflators, China is maybe the biggest money creator. Despite the narrative that China is moving away from a credit orgy of fixed asset investment towards a service driven economy, nothing is further from the truth. New loans grew 31% through Q3 in 2015 and most of that was old industry firms as I have already covered. This is not the sign of an economy restructuring, this is the signs of a desperate economy trying to maintain any semblance of growth.
Do you believe China will sacrifice GDP growth to defend the yuan?

The IMF vote is next month. China is unlikely to allow the yuan to drop before then, but conditions not only continue to favor a weaker yuan, they intensified in September.

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