Is China’s Import Surge Real?

People frequently assume that I believe you can reduce every Chinese number by some percent to arrive at the true number. However, what I tell them is that you have to dig beneath and understand the dynamics to arrive at a reasonable conclusion about what that number means and that it may be over or understated. Chinese import data is a case and point.

Chinese imports are up 17% YTD and are ripe for skepticism but in reality probably pretty accurate. However, besides the large increase which raises eyebrows, there is also the fact that payments for imports are up only 7%.  So how can we conclude that the import data is relatively accurate given the large jump in imports and the only moderate growth in payment for imports?

Import growth into China for the past few years has been flat or declining.    Flat in 2014, down 14% in 2015, and down 5% in 2016.  The 2017 growth we have seen for recent history is truly an enormous outlier.

For the past few years, Chinese importers were overpaying for imports by a relatively significant amount.  In 2015, the discrepancy between imports reported at customs and at bank payments amounted to $526 billion USD.  In 2016, this number had dropped to $271 with most of that decline coming in Q2-Q4.

This raises two specific possibilities focusing on customs reported imports. Either physical imports were under reported and payments were accurate or physical imports were accurately reported and payments were over paid.  Absent much more granular data, it is difficult to know for sure, but there is little reason to believe, for many reasons we won’t explore here, physical goods imports were under reported. This means that payments were overpaying for given level of imports.

Now in 2017, if overpayment was still a problem, we would expect to see payments go up by either a similar amount or even more. What we see however is the exact opposite. Payments have gone up by significantly less than imports.  To add to this, not only do we see payments growing much slower than trade, we see that the gap between imports and payments is only $146 billion USD and on track to report $220 billion for all of 2017.

If we believed that Customs reported imports were significantly and structurally under reported prior to 2017, it might be easier to believe that imports are over stated this year, but we have little reason to believe that.

Consequently, the moderate growth in payment actually supports the idea that Chinese import growth has surged significantly. Because import levels are moving much closer to the reported payment level, it indicates that Chinese inspectors are spending more time matching physical imports to what is paid for those imports.

Most importantly, this implies that Chinese crackdown on capital outflows primarily through gray market methods is working. It should be noted that this does no imply there is less desire, only that Chinese inspectors are doing a better job matching different physical and goods flows.  Conversely, it is likely, that Chinese import and payment data is much more accurate.

As I will say, you cannot just assume a given state about Chinese data.

Catching Up on the Chinese Economy

As we start the school year, I want to just throw a bunch of thoughts about the Chinese economy up about what I have been seeing.  We will resume regularly scheduled programming next week.

  1. The Chinese economy is headline robust in 2017. While I may spend more time pointing out the problems that are continuing to grow in China, make no mistake that the 2017 Chinese economy is robust in nominal and real terms.  We see this across a range of indicators and though we can always debate Chinese numbers, I don’t think it is any exaggeration to say that 2017 is a strong year economically for China.  There are however many caveats and important details that need to be remembered.
  2. 2017 is effectively an election year in China. In an authoritarian dictatorship, where one man/Party controls all levers of power, this makes it easy for the government to juice the activity.  This is what has happened.
  3. For all the rhetoric of deleveraging and reigning in credit or leverage, in reality, it has simply accelerated from 2016.
  4. What has happened is that where the credit is flowing has been diverted into different channels or sectors. Non-financial corporate has seen growth slow to more reasonable levels but financial corporate and households have seen credit boom. Even within the specific products, some have slowed growth dramatically but other have grown very rapidly. To me, while this buys time, it does nothing to change the ongoing risk buildup.
  5. What is driving the Chinese economy are all the sectors that they have said for years, that they wanted to move away from. Infrastructure investment, real estate, credit, and exports driven by an engineered currency.  There is no change in the Chinese economic model.
  6. There is NO supply side reform. It simply is not happening.
  7. Be wary of the China is reflating argument. Headline Pthis should be conPI is up pushing up nominal growth even as real growth has been bumped up a couple tenths of percentage points. Many have taken to arguing that the economy is deleveraging.  This in my humble opinion is a very flat reading of the data.  There is no broad based price inflation in China. The vast majority of categories in China have very low borderline deflation level price increases.  However, a small number of key input categories have very large say triple digit year over year price increases.  Coal and steel, though other base inputs have experienced similar price increases, are the major examples. What you have is, to use a statistics term, is a bimodal distribution, where most prices are just above flat and a couple of categories are extreme outliers.  You do not have deleveraging in the Chinese economy, you have deleveraging in base input industries like coal and steel.
  8. This price reflation appears to be driven less by economic fundamentals and more by financial flows that have been encouraged by Chinese authorities. This has entirely turned around the liability growth in base input industries like steel and coal and profitability but we shouldn’t confuse this for a revitalized industrial base.  Unless WMPs continue to boost commodity allocations, we simply will not see this level of price increase again.  The bigger problems are that these industries really are not rationalizing their capacity levels and that net margins are still tiny even after triple digit price growth.  Any fall in the traded price will have an enormous impact on profitability.
  9. I am not personally expecting any type of real slow down in the second half and leading up to Chinese New Year.
  10. I would personally be surprised if there is any type of significant crackdown on things like debt in the next year. While some have now been speculating, just like the first time Xi was crowned, that he would be an economic reformer  and crack down on risky activity, this should be considered purely speculative. Fact of the matter is any real restriction of credit growth, real estate, and infrastructure investment would crater asset prices. Think of it this way: mortgage growth is up 30% and real estate prices are up 10%. What happens if there is any significant slowdown in mortgage growth?

The headline numbers are distinctly better in China but the fundamental problems keep growing.