Acabo de publicar un artículo para Funds People, haciendo una pequeña actualización de la situación económica de China. Se puede leer pinchando aquí.
Un breve comentario aquí para nuestros lectores. Dado el elevado volumen reciente de noticias sobre la salud económica de China (que se unen a la rebaja de rating por Moody’s anunciada hoy), muchos analistas se preguntan en qué estado se encuentra la economía en estos momentos. Aunque nuestros lectores ya saben que, si hace falta, podemos presentar análisis algo más complejos (aquí y aquí, por ejemplo) sobre China, para seguir la evolución económica de China preferimos seguir el criterio de Ockham: cuanto más sencillo, mejor. Usando este criterio, el mejor indicador es el crecimiento en los volúmenes de inversión: volúmenes altos (en concreto, por encima de la tasa de crecimiento del PIB real) implicarán que la economía no se está reequilibrando y que la deuda total sigue creciendo. Dicha tendencia no ha cambiado recientemente, como se puede en el siguiente gráfico:
En otras palabras, monitorizando los crecimientos en la inversión se vigilan de manera implícita: i) los crecimientos en la deuda y ii) si realmente el PCC avanza con las prometidas “reformas desde el lado de la oferta” (supply side reforms). Parece que desde ambos puntos de vista, el proceso de reequilibrio no está teniendo hasta el momento el impulso suficiente desde Pekín.
Michael Pettis has recently published a post discussing an article that appeared in the FT some weeks ago, authored by Gabriel Wildau, Yuan Yang and Tom Mitchell, which discussed the economic dilemmas China will have to face in the (near) future given the current high levels of corporate debt and (still) high levels of corporate investment. We found both Pettis’ post and Wildau et al. article very interesting and quite similar in spirit to what we have written several times (here and here), and because we have not published anything on China for several months, we thought it could be a good time to provide a brief update of our views.
But first, it may be useful for our readers to explain briefly the main arguments posed by Wildau et al. and Pettis, respectively. The main goal of the FT article is to go through three different counterfactual rebalancing scenarios, discussing also the extent to which they could happen or not. Although the hypothetical scenarios are discussed in a heuristic way and the article does not crunch any numbers in detail (as we usually do, or for that matter, Pettis), we cannot but agree on the importance of that approach. Because several economic variables are, in principle, politically determined by Beijing, the dynamics of the Chinese economy are more ‘deterministic’ than in any other economy of the world, so the paths that the rebalancing process can take can be reduced to a handful of possible scenarios.
The first possible scenario proposed by the FT article (the most optimistic one by any standard), which we can dub ‘the conventional wisdom up to now’, posits that because consumption and the needs of the Chinese population (holidays, healthcare, education, and so on) are growing, there is an ‘unlimited demand’ for everything. According to this scenario, we are told that the growth in consumption will fill the void left by investment, and that the rebalancing process will proceed smoothly with high GDP growth rates and no major financial disruption. Continue reading
[this is the translation of an article originally published in FundsSociety]
Some days ago, Bloomberg published an article featuring a comparison between the stock market valuations of the Shanghai Stock Exchange against the valuations of other major exchanges in the world. The key message of the article was that, despite falling 40% from the peak reached in June 2015, the index was still dear according to the median PER – in China, such a measure reached 60 times, in comparison to 20x and 13x in the US and Japan, respectively. To conclude, the article presented several opinions that stressed the low visibility for corporate profits in the short-run, given macroeconomic uncertainty and the difference in valuations and opportunities between the old economy (raw materials, industrials and real estate) and the new economy (technology, leisure, healthcare, etc.).
In fact, although making a one-year corporate profit forecast is a tough task, it is less hard if we make a ten-year forecast. Such a claim, although it may sound counterintuitive, is due to the macroeconomic dynamics that China will have to face in the medium-term. By this, we mean the rebalancing process, which implies reducing the investment share in GDP (and increasing the share of consumption) from roughly the current 50% down to 30% or less. That the rebalancing process implies moving resources from investment to consumption is already a well-known fact, and the investment community is starting to benefit from this insight recommending taking positions in consumption-related sectors and shying away from investment-intensive sectors – although, on the other hand, given analysts’ interpretations on the macroeconomic data published in May highlighting the supposedly ‘low growth’ of investment of around 9%, one wonders whether the analysts have yet understood even the basic concepts of the rebalancing process.
Acaban de publicar en FundsSociety nuestra visión sobre los retornos del mercado bursátil chino durante la próxima década. Puede consultarse aquí. En resumen, creemos que los índices chinos estarán en el mismo nivel de aquí a diez años (en el mejor de los casos, asumiendo múltiplos de valoración constantes), ya que el proceso de reequilibrio no sólo implica mover recursos de la inversión al consumo, sino también de los beneficios a los salarios.
Dado que la participación de los beneficios en el PIB tiene que caer a la mitad si se quiere completar el proceso de reequilibrio, y teniendo en cuenta que en el mejor de los casos el PIB en términos nominales crece al 7% en la próxima década, los beneficios en términos absolutos quedarían igual que hoy. Una aplicación muy elegante de la ecuación de beneficios Levy-Kalecki.
Chinese policy makers were gathered at the National People’s Congress (NPC) a couple of weeks ago to discuss the economics goals for the next few years. Given the recent turmoil in Chinese financial markets, it was an important meeting for international analysts.
Several issues were addressed at the NPC, but the most important one was the strict commitment of the Communist Party to keep sustainable (and moderately high) growth rates. For this year they have abandoned fixed targets and they have opted for some flexibility in their goals (e.g. 6.5% – 7%). ‘More active’ fiscal policies, through higher current and investment expenditures and tax cuts, were also put forward in order to achieve deficits around 3% of GDP – which is in stark contrast with the government position of the last years. But as we will see in a while, these goals (6-7% nominal GDP growth plus 3% of fiscal deficits) do not meet People’s Bank of China projections for government debt, unless other ‘extraordinary’ government operations (bailouts of banks and local governments in particular) are brought into the picture. Finally, the Communist Party has also suggested higher levels of inflation (around 3%) than in recent Chinese history.
The governor of the People’s Bank of China (PBoC), Zhou Xiaochuan, had some days ago an interesting interview with the financial magazine Caixin. You can find the English transcript here. The initial part of the interview is really worth reading (and not so much the last part, which deals with criptocurrencies and other topics that are not “core issues” for the PBoC at the moment). Right at the beginning Zhou talks about the prospects of an additional (or not) depreciation of the renmimbi and how China has moved from a dollar-peg regime to a basket-currency regime (although such baskets are still very loosely defined). And by the way, he is not very concerned about international reserves going down (around 100USD billion in January), because he thinks this process is mainly driven by Chinese firms trying to reduce their foreign currency denominated liabilities, a process that (obviously) will not be endless. As he says:
As such, it is necessary to distinguish capital outflows from capital flight. It is normal for export-oriented enterprises to choose their foreign exchange conversion strategies and adjust their liability structures after weighing benefits and costs. Such adjustment will not be endless. Such behaviors do influence capital flows and foreign exchange reserves, but they do not necessarily constitute capital flight.
But the most interesting part of the interview is when he talks about investment expenditures. Although he does not address explicitly in these paragraphs the rebalancing process (how to reduce current investment levels and increase at the same time consumption without any disruption), it is clear that some conclusions for the rebalancing issue can be drawn from the following statement [emphasis added]:
Professor Michael Pettis has recently published another brilliant post on the Chinese rebalancing issue. We regularly follow Pettis’ views on the Chinese economy, which we consider valuable if one wants to understand the macro management dilemmas China will have to face. In his post, Pettis does not address how the rebalancing process should be ideally done (something which he has explained on several occasions), but rather how much time China has in order to accomplish it successfully. Pettis says that:
Credit growth in China is too high as are current debt levels, and the sooner Beijing gets credit growth under control, the better. This latter statement in itself is not controversial of course, but my simple debt model shows just how urgent it is for Beijing to get credit growth under control. It clearly does not have ten years or even seven years. It might have five years, but only if the markets – Chinese investors, businesses, and savers, both wealthy and middle class – are convinced that it is moving in the right direction.
In other words, the current high levels of debt can derail the rebalancing process if it is not done quick enough. In order to understand the link between debt levels and GDP, Pettis proposes a simple model that captures their dynamics over the long run (up to 2023). In his baseline scenario, Pettis assumes (following the trend of the last few years) that nominal debt initially grows twice as fast as nominal GDP (notice the use of nominal values), but gradually converging in a linear way to the growth rate of GDP by the end of 2023 – at that moment the economy reaches a steady-state position, and GDP and debt grow at the same pace. Depending on the GDP growth rate assumed, Pettis’ model projects debt-to-GDP ratios from 251% (with a 3% growth in GDP) to 274% (with a 6% growth) by the end of the period, too high in comparison to other economies. He then proposes alternative scenarios, but the result is the same: unless Beijing advances more radical measures to curb debt growth and improve the efficiency of the financial system, the growth in debt will derail the rebalancing process.
Los servicios financieros han crecido considerablemente en el tercer trimestre de 2015, de acuerdo a las estadísticas oficiales chinas
Otro post sobre la situación económica China. Van apareciendo muchos en este blog. Pero como va a ser el predecible tema estelar económico mundial de los próximos meses este post no será el último… ni el penúltimo. Desde nuestro post junto antes del desplome de la bolsa china (timing preciso), en el cual adelantábamos la imposibilidad de un aterrizaje suave de la economía China (léase crisis económica grave -caída del PIB- antes o después) empiezan a abundar los análisis sobre el estado de la economía china: algunos ya contemplan la posibilidad de que el crecimiento esté realmente reduciéndose, en contra de las cifras oficiales de un mantenimiento del crecimiento de alrededor del 7%, dudándose así la fiabilidad de los datos de la contabilidad nacional china. Los últimos datos aparecidos hoy, correspondientes al tercer trimestre de 2015, con un crecimiento del 6,9% del PIB, no hacen sino confirmar lo que comienza a ser algo bastante recurrente.
En el anterior post ya tratábamos de estos temas, haciendo hincapié en un informe de Macquarie sobre el deterioro financiero de las empresas chinas en los sectores más directamente involucrados en el sector de bienes de inversión (industria de construcción y sus materiales -cemento, acero-, bienes de equipo, viviendas, etc.). Para lo que queremos explicar ayudan también las estimaciones de los beneficios de las empresas del sector de inversión compilados por Christopher Balding, profesor de la Universidad de Pekín, y que lleva varios años evaluando la fiabilidad de las estadísticas chinas – y que, sin ir más lejos, ha escrito hoy un post interesante cuestionando los números publicados por las agencias chinas hoy. Continue reading
Macquarie, the Australian investment bank, has published this week a report on the financial state of the Chinese corporate sector. Unfortunately, the report is not public and I will have to rely on the summary written by Tyler Durden.
The report is especially important because it is based on an analysis of 780 Chinese companies, so, unlike most of the reports on the financial health of the Chinese corporate sector that take a macroeconomic perspective (as we did here), Macquarie’s report takes a microeconomic approach, focusing on the Chinese commodity sector. Given that Chinese national accounts data has been lately under the scrutiny of the international financial community because of its unreliability, the micro approach of the Macquarie report can shed some additional light on the financial health of Chinese corporations. Continue reading
Krugman has just published a post that addresses the economic situation in China. He thinks (as many other economists) that we should not be very worried about the possible side effects of China on the rest of the world. Well, the Chinese economic performance is already hitting many economies (mainly through commodity prices) around the world (has anyone said Brazil?), so maybe the “price effects” that Krugman mentions are larger than what he thinks they are.
But here I don’t want to attack Krugman (because overall he seems quite mild about Chinese prospects), but rather I would like to comment very briefly on a report mentioned by him and published by Willem Buiter at City. The report is worth reading, because it makes the case for a global slowdown driven by the (under)performance of the Chinese economy.
There are many sentences in the report I would largely agree with. For instance, when talking about why China’s government debt burden is not as rosy as it seems, Buiter mentions that:
The soaring non-financial private sector debt burden and the matching soaring banking and shadow banking sector balance sheets suggest that a future financial rescue of systemically important and/or politically well-connected insolvent private entities and SOEs by the central government is likely. This could seriously strain even the fiscal capacity of the central government.