Beneath the headlines of 8 percent growth, China's economy is grinding to a halt. It's time to worry.
China is a riddle wrapped in a mystery inside in an enigma stuffed in a black box of economic data. There aren't many countries growing 8 percent a year that might also be in recession.
You heard me right: China might be in a recession today. We can't trust the country's GDP numbers. Just ask possibly-future premier Le Keqiang. In a 2007 cable made public by Wikileaks, Le dismissed China's GDP figures as "man-made." Le explained that he only looked at three statistics to gauge the health of the economy: (1) Bank lending, (2) Electricity consumption, and (3) Rail cargo volume. And these measures say China's economy is screeching to a halt.
Let's take a look at these top five reasons China might already be in recession -- such as the "evidence" is.
1) LOANS COLLAPSE. Bank lending has fallen off a cliff recently. Rather incredibly, government officials conceded that banks may miss their lending target for 2012. Remember: China still has a state capitalist model. The government sets targets for loans, and the banks have -- until now -- hit them. What's the problem today? A simple lack of demand for loans. After raising interest rates and reserve requirements to rein in the bubblicious housing sector, housing prices have begun falling. That's left developers underwater, unable to roll over what they owe, and not too keen to take out more debt despite monetary easing. Combine that Europe's continuing flirtation with financial Armageddon -- not exactly what China's exporters want to see in their biggest market -- and it's not looking like an especially good time to borrow more.
2) and 3) ELECTRICITY AND RAIL CARGO FALL. The data on electricity usage and rail cargo volume are a bit more nebulous. They're not as bad, but not good either. According to state news agency Xinhua, electricity usage fell in April compared to March. It still grew compared to the previous year, but that abrupt month-over-month fall is disconcerting. And as David Piling points out in the Financial Times, the same flat-lining has happened lately with rail cargoes.
4) BUSINESSES ARE BLUE. The Purchasing Manger Index (PMI) is a
survey of private businesses that asks a straightforward question: Are
things getting better, worse, or staying the same? A reading above 50
indicates conditions are improving; below 50 means conditions are
worsening. The unofficial -- and thought to be more credible -- numbers
from HSBC haven't been good, and they're getting worse lately.
On Thursday, the reading came in at 48.7, down from 49.3 the
preceding month. That marks seven straight months of sub-50 (read:
contracting) numbers. The charts below from Markit Economics, via FT Alphaville, break the PMI into its constituent parts. Neither is doing well.
5) WHO SAID 'STIMULUS'? Here's the most reliable indicator that China's economy might
be slowing far more than the official numbers let on. Their leaders are
already talking about new stimulus.
But even if China does open the monetary and fiscal floodgates, that
doesn't mean we should stop worrying. Popping a housing bubble -- which is what China is trying to do -- is usually an economic death sentence. Policymakers mistakenly think that they can loosen once prices fall "far enough" and prevent a "correction" from turning into a deeper slump. But it usually doesn't work that way. Land isn't just an asset. It's collateral too. When land
prices fall, borrowers end up underwater. And underwater borrowers don't
want to borrow more until their balance sheets are right-side up, even
at zero rates. That's what happened to Japan in the 1990s. It's what happened to us in 2008. And it's why China's rapidly falling loan numbers are so worrying now.
But this time might be different. The normal rules don't always apply to China. Its hybrid statist-capitalist system makes it a black box -- and a black box that could very well power through a housing slump. When the banks are state-owned and the big companies are state-owned, the government can hypothetically demand that they make and take out loans. Or it can bring much more pressure on private companies to do so. Or launch a massive fiscal stimulus.
This might be little more than a blip. China's leaders could easily step on the economic throttle and get growth back on target over the coming months. But there's real weakness beneath the headline numbers. And the track record of countries deliberately popping bubbles is awful.
But if there was ever a place where things might be different, it's China. For the sake of the world economy, let's hope so.