In the past week or two, I have been able to talk with a variety of people who are well positioned to provide well informed thoughts on the Chinese economy. The common consensus appears to be that while the economy isn’t collapsing, it is none the less quite weak.
Despite Chinese Premier Li Keqiang and GoldmanSachs both touting the Chinese growth story, the story from business sounds much weaker on the ground and after considering what is driving the turn around.
In conversations with the Chairman of a listed Chinese firm who though confident in his businesses prospects, said middle single digit growth was expected this year with other firms in his region who did not have a unique technology like he did faring much worse. He specifically singled out lower value manufacturing as getting decimated.
Another senior executive for a major technology multi-national with mostly Chinese clients gave guidance also in the mid to low single digit revenue growth range. He relayed that in his interactions with outside firms, such as clients and suppliers, this seemed to be a pretty common refrain.
While the Chinese economy and finances may not be on the verge of imminent collapse and even rebounding somewhat, the mid-range prospects over the next 6 months remain worrisome with longer range risks even higher.
Infrastructure investment is growing at 30% annually with steel production expanding at close to 20%. This is as usual being driven by large growth in credit. While formal bank loan volume continues to decline, the expansion of credit continues unabated at more than 20% year over year. As the Financial Times citing Capital Economics note, “the omens for the short term are good, but at the cost of making the economy’s structural problems worse.”
Chinese banks however are in no position to expand lending and are probably driving the expansion in off balance sheet credit. They are lining up to tap international credit markets, though it has yet to be seen if international investors in Hong Kong have the risk appetite. Given that Chinese banks listed in Hong Kong face a $50 billion USD capital short fall, hedge funds buying at a discount might be the only buyers willing to buy a Chinese loan portfolio in the current environment.
Even JP Morgan in a recent research report said their long term outlook on Chinese banks is negative given questionable asset quality and their projection of growth falling under 7%. With some banks having near 50% of their wealth management products in non-standard credit assets, the potential for enormous levels of unrecognized risks on balance sheet remains high.
Despite all the talk of reforms, rebalancing, and the rise of the Chinese consumer, nothing has changed. Chinese growth numbers are being driven by credit growth, fixed asset investment, avoiding any real change. China has managed to keep the growth numbers up, but that doesn’t make the mid to longer term outlook any better.