China Growth Slows But Revival Policies Show Promise China’s economy slowed further in the first quarter, though policies aimed at reviving it appeared to have positive effects.
China’s gross domestic product expanded by 6.7% year-over-year in the first quarter, down from a 6.8% gain in the previous quarter, the National Bureau of Statistics said Friday. (…)
Chinese financial institutions issued 1.37 trillion yuan ($211.3 billion) in new yuan loans in March, rocketing well past economists’ expectations of around 1.1 trillion yuan, and almost twice February’s volume. (…)
M2, the broadest measurement of money flowing through the economy, edged up 13.4% at the end of March compared with a year earlier, powering ahead of the government’s full-year target of 13%.
(…) Industrial production grew 6.8% in March, the fastest in nine months. Fixed asset investment, spending on things like factories and infrastructure, grew 11.2%, much faster than the 6.8% low it hit in December. (…) and retail sales were up 10.5% in March – all outperforming the first two months. Property prices are sharply up in China’s major cities. Shanghai’s stock market has regained 14% in value since the start of March this year. Last month, China’s foreign-exchange reserves grew for the first time in five months.
Housing sales in the first quarter rose 60.3% and construction starts rose 19.2% from year-earlier levels, the statistics agency said Friday. Completed homes that remain unsold rose 7.4% in square-meter terms in the quarter, however, it added. (…) Much of the recovery in prices and activity has been in China’s so-called tier one cities—the four largest cities—and regulators there are already clamping down to prevent things from getting out of hand.
In the rest of China, the property recovery is far more subdued, and inventories of unsold apartments remain substantial. Around 95% of real estate sales occur outside of those top four cities, notes Louis Kuijs of Oxford Economics, so unless the boom spreads, the impact on the broader economy will remain muted.
China’s Weakness Is Not About GDP
(…) Yet even putting aside the accuracy of official numbers, first-quarter results from our China Beige Book, a nationwide survey of 2,200 Chinese firms, show that focusing on topline growth is a mistake.
Through the traditional prism, our data appear to show a welcome improvement, with revenue growth steadying and profit growth rebounding a bit off last quarter’s lows. But this may have occurred on the back of a daunting problem: substantial labor-market weakness.
Led by rising layoffs at private firms, job growth dropped notably for the second consecutive quarter, sliding to a four-year low. Expectations of future hiring took a similar dive. Overall, the share of firms hiring this quarter fell to half of what we reported in 2012.
This deterioration has wide-ranging implications. Despite the economy’s overall deceleration, China has been able to defy calls to be more aggressive—either via reform or stimulus—because of the remarkable stability of its labor market.
This bought time, but Beijing hasn’t used it wisely. If the weakness in employment continues, the credibility of government policy will be challenged by those who matter most: not financial commentators but ordinary Chinese.
Two related areas of weakness also stand out. The first is capital expenditure, where a multiyear slide continues to accelerate. In mid-2014, our survey called an inflection point for investment, and since then the share of firms reporting capital-expenditure growth has crashed by more than 40%.
The first quarter marked another new low for capital expenditure, amid the sharpest drop thus far. The fall was evident across all size categories, but a critical divergence can be seen on-year between state-owned enterprises, which held capital expenditure stable from a year ago, and private companies, which cut back substantially.
The good news is that the private sector is pushing forward needed rebalancing. The bad news is that rebalancing means less spending and more layoffs.
Weaker capital expenditure is part of the reason for job-market deterioration. A broken credit transmission mechanism, in turn, contributes to those weaker levels of spending. Despite endless talk of stimulus, on-the-ground borrowing costs rose at both banks and nonbank financial firms this quarter, as lenders continue to grow pickier.
More important, our data show most firms aren’t borrowing and don’t want to. While our access-to-capital gauge ticked up slightly in the fourth quarter, it was only to the second-lowest level we’ve ever recorded. Bond issuance also ticked up, but remained substantially below last year’s peak.
As has been true since 2013, none of the talk or action with regard to monetary stimulus has yet convinced firms to access capital. The notion that reigniting growth merely requires an ever-growing supply of credit, a prescription many analysts even now still advocate, has been misguided for three years and counting.
These related developments indicate a much more worrisome picture than sectoral or national growth gauges reflect. Firms first stopped borrowing, then cut spending. Now they are becoming allergic to hiring.
Less borrowing and spending have obvious drawbacks but were necessary after the excesses of 2009 and 2010. Less hiring would be a much worse problem for Beijing and the provinces.
These trends are particularly ominous considering that the presumed panacea—the ever-hyped transition from manufacturing to services—was on hiatus for at least another quarter. Our data show the performance of services in absolute terms was comparable to manufacturing this quarter, but that represents a deterioration from last quarter, which was even weaker. Reliable evidence for the transition to services may not emerge next quarter either, as both services capital expenditure and revenue expectations slipped.
With perceptions about China likely to guide global markets again in 2016, it has become more important for investors to look beyond headline GDP numbers—official or private. After all, Beijing didn’t seem overly concerned when many indicators signaled weakness but job growth remained steady. If the opposite combination persists, China’s purported restructuring and reform could lose the faith not only of markets, but also of the masses.
Bearnobull readers already knew about the weakening trends in employment:
- From Markit’s China manufacturing PMI, which has been in contraction for a year, as dutifully posted on this blog:
(…) Chinese goods producers continued to cut their payroll numbers at the end of the first quarter. The rate of job shedding eased only slightly since February’s post-recession record and was solid overall. Lower employment was generally attributed to company downsizing policies that were implemented to cut costs.
- From Markit’s China services PMI, which has been slowing for a year, as dutifully posted on this blog:
(…) the Caixin China General Services Business Activity Index posting at 52.2, up from 51.2. That said, the reading continued to point to a modest rate of expansion that was slower than the series average.
Despite the slightly stronger expansion of business activity, services companies took a cautious approach to staff numbers. This was highlighted in March by the first fall in service sector employment since August 2013, albeit only slight. Companies that reported job shedding generally commented on the non-replacement of voluntary leavers and, in some cases, job cuts due to relatively muted growth in new work.
Consequently, composite employment fell at the sharpest rate since January 2009.
Is China’s Economy in even Deeper Trouble than We Think?
Rail freight volumes are an indicator of China’s goods-producing and goods-consuming economy, not just manufacturing, construction, agriculture, and the like, but also consumer goods. Thus they’re also an indication of consumer spending on goods. Alas, rail freight volume is collapsing: the first quarter this year puts volume for the whole year on track to revisit levels not seen since 2007. (…)
Rail freight volume plunged 9.4% year-over-year to 788 million tons, according to data from China Railway Corporation, cited today by the People’s Daily. At this rate, rail freight volume for 2016 will be down 20% from 2014, which had already been a down year! At this rate, volume in 2016 will end up where it had been in 2007! (…)
Germany Doubles Down on Fiscal Discipline
Germany doubled down on fiscal discipline on Wednesday, pledging to balance its budget and crank down the national debt through at least 2020, just as financial leaders prepare to convene in Washington, DC to discuss fresh stimulus for the sagging world economy. (…)
The move underscores Germany’s ambition to remain a European role model for sound finances despite facing unexpected challenges such as the migration crisis. But it also shows Berlin’s growing isolation in seeking to rein in government spending and put the brakes on easy money, just as policy makers elsewhere focus on the need for fresh economic stimulus. (…)
But Berlin’s message to financial leaders will be that they should focus on implementing agreed economic overhauls instead of seeking fresh stimulus, senior German finance ministry officials said.
German officials have been increasingly critical of the stimulus efforts of the European Central Bank, which they worry are harming German savers. Finance Minister Wolfgang Schäuble last week called on governments in Europe and the U.S. to encourage their central banks to gradually end their stimulus programs. (…)
Europe’s New Demand Driver
The euro has appreciated 3.7 percent against the dollar in 2016, but that’s less of a concern to the regional economy than it would have been just a year ago. The chart below shows why. Between mid-2014 and early 2015, rising exports were responsible for most of the increase in total demand for European goods and services. However, total demand increased in the last three quarters of 2015 even as exports, which are sensitive to a stronger currency, declined. Domestic demand made up for weaker exports and, by year-end, contributed more to euro area growth than at any time since late 2007.
Domestic demand is surging partly because the collapse in oil prices and resulting low inflation boosted real incomes. But even if inflation rises sharply later this year, as Credit Suisse expects it to, the bank’s analysts say solid employment growth should continue to buoy domestic demand. Since GDP growth that results from domestic demand tends to create more jobs than export-driven growth, Europe is likely to benefit from a virtuous, self-sustaining cycle that doesn’t depend on a weak euro.
In case you missed my March 4 post:
EUROZONE RETAIL SALES EXPLODE
I have not seen this in any mainstream media. Yet it could be the most important economic news this year given that it comes along the same strong trend in U.S. retail sales between November and January. The volume of retail sales in the Euro Area rose 0.4% MoM in January following a 0.6% jump in December. Last 2 months annualized: +6.2% in real terms, during the two most important months of the year (Eurostat).
Core retail sales were even stronger rising 0.5% and 0.7% MoM in December and January respectively, a 7.4% annualized rate, in volume.
It seems that consumers are finally reacting to the oil windfall. If this continues, we’re in for many surprises…
February’s data maintained the trend with total sales up 0.2% with little revisions to recent stats, quite unlike the U.S….
In Japan, an Experiment Is Floundering Japan’s experiment with negative interest rates is producing some unexpected results—the latest evidence of how once-unthinkable policies are playing out around the world.
Money markets allow banks and other financial institutions to lend and borrow money for a period of less than a year, often not backed by collateral. If fewer banks invest cash in short-term markets, it is harder for other banks to get short-term loans to finance their operations.
Japanese trust banks that manage cash on behalf of mutual and pension funds have in recent weeks been placing excess money on deposit at the BOJ rather than into overnight money markets, where it might now attract a negative interest rate.
(…) “There is no guarantee that lowering interest rates encourages corporate capital expenditures or expedites the shift of household financial assets from savings to investment,†said Nobuyuki Hirano, president of Mitsubishi UFJ Financial​Group​Inc., Japan’s biggest bank, on Thursday, adding the negative-interest policy had caused households and businesses to rein in spending amid growing uncertainty over the future. (…)
Problems in the money markets have run counter to Mr. Kuroda’s expectations: last month he said that as market players get used to negative rates, money-market trading should increase. Mr. Kuroda predicted banks that had to pay a minus-0.1% interest rate on some of their reserves would want to lend out that money for a higher rate.
Instead, Japanese financial institutions have been searching overseas for higher returns, without a corresponding rise in investment at home. Japanese investors bought a total of ¥5.47 trillion ($50 billion) worth of foreign securities in March, up 11% from February, according to the finance ministry.
In turn, the amount foreign financial institutions can charge to lend greenbacks to Japanese investors has surged. The premium for a three-month contract to exchange yen for dollars is now at ¥0.298, almost twice what it was a year ago.
Foreign investors have been recycling the yen they get back into Japanese government bonds, traders say, even though yields on a range of these bonds have turned negative in recent weeks—meaning investors who buy them end up paying money to Japan’s government. But the fee foreign institutions can charge to lend dollars is now so high that it outweighs the cost of holding negative-yield-bearing bonds, which remain the safest place for investors to park their yen.
The upshot: an unusual bout of foreign interest in Japan’s government bonds, an often sleepy market where overseas investors have generally held under 10% of outstanding bonds. Net foreign buying of medium-term Japanese government bonds was double the 12-month average in February, the most recent month for which data are available.
In all, foreigners bought a net ¥18.3 trillion worth of Japanese government bonds in February, according to the Japan Securities Dealers Association, up 16% from the month before. Overseas investors accounted for over one-quarter of all trading in short-term Japanese government bonds that month, and 15% of trading in medium-term bonds.
The strong desire among some Japanese investors for dollars hasn’t been enough to keep the yen down, however.
“There’s no rhyme or reason on why the yen would strengthen when interest rates are negative,†said Bart Wakabayashi, managing director at State Street Global Markets. “But the yen has now reasserted itself as a safe-haven currency on concerns about China and the global economy. And at the same time, doubts are emerging over the staying power of Abenomics.â€
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Bank of Japan’s Kuroda Calls Yen’s Recent Rise ‘Excessive’
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Japan warned not to devalue the yen Tokyo lacks options as stronger yen drags on economy
How One Danish Couple Gets Paid Interest on Their Mortgage As central bankers push deeper into the world of negative interest rates, the once-unthinkable policy is playing out on the ground. In Denmark and Sweden, real estate is booming; some homeowners are even getting paid interest on their mortgages.
Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner.
Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%. (…)
Denmark, where the central bank’s benchmark rate stands at minus 0.65%, has lived in negative territory longer than any other country. Neighboring Sweden has been below zero for 14 months, and its central bank has said it would go lower than the current benchmark of negative 0.5% if it needs to. In Norway, the central bank still has positive rates, but it is considering resorting to negative ones to prop up an economy hit hard by the prolonged spell of low oil prices.
Scandinavia’s experience has given economists a chance to study what happens when rates drop below zero—long considered an inviolable floor on rates. Already, there are concerns about undesirable side effects. Consumer savings accounts pay no interest, and there is pressure on bank profitability. A boom in real-estate borrowing has kindled fears that problems will arise if rates bounce back up.
“If you had said this would happen a few years ago, you would have been considered out of your mind,†said Torben Andersen, a professor at Denmark’s Aarhus University who serves on the government’s economic-advisory council.(…)
Authorities in both countries are concerned that low rates have caused households to gorge on loans that they won’t be able to repay if rates increase or real-estate values fall. “It’s dangerous,†Riksbank governor Stefan Ingves said in an interview. “Our households are borrowing way, way too much. It must be reversed sooner than later.â€
Mr. Christensen, the financial consultant, bought his home outside Aalborg for 1.7 million Danish kroner ($261,000) in 2005, then renegotiated his mortgage several times after rates dropped. His interest rate first dipped below zero last summer. Because of various mortgage fees, he still pays a modest amount each quarter in addition to his principal payment.
It isn’t known how many Danes have negative rates because lenders often don’t disclose such numbers. Realkredit Danmark, one of the nation’s largest mortgage lenders, said it provided 758 borrowers with negative interest rates last year.
The flip side of the picture is that banks no longer pay interest on most saving accounts. Mr. Christensen said Danes are turning to property investments as an alternative. (…)
Mr. Ingves, the Swedish central bank governor, is concerned that the ratio of Swedish household debt to disposable income, which stands at around 175%, up from a low of 90% in the mid-1990s, is “unsustainable.†(…)
Authorities also are concerned that negative rates could hurt banks by sapping their ability to make money. Negative rates mean commercial banks incur fees, rather than collect interest, when they park money with the central bank—something they must do for regulatory reasons and to facilitate lending among themselves.
An industry lobbying group estimated the cost to Danish lenders at more than 1 billion kroner last year. (…)
EARNINGS WATCH
- 32 companies (8.7% of the S&P 500’s market cap) have reported. Earnings are beating by 4.0% while revenues have missed by 0.1%. Expectations are for a decline in revenue, earnings, and EPS of -1.5%, -9.4%, and -7.2%.
- EPS is on pace for -3.5%, assuming the current beat rate for the remainder of the season. This would be +1.4% excluding Energy. (RBC)