China’s electricity consumption (green line) is the best real-time guide to economic developments. It is now beginning to confirm the blog’s suggestion that a major shakeout is underway as the new leadership takes charge:
• Consumption soared in response to the massive stimulus programme
• But it is now up only 5% so far this year, and is trending downwards
Developments in bank lending (red column) confirm this analysis:
• Superficially they appear positive, with lending up 13% this year. But credit bubbles always require more and more lending to sustain them
• Each new dollar produces less impact than earlier dollars. And earlier loans start to go bad as they have failed to generate an economic return
State-owned China Daily confirms this trend is now underway, reporting that “Top banks (are) weighed down by overdue loans“. It highlights data from a new PwC study suggesting that overdue loans increased 29% in 2012 versus 2011.
Even more worrying, however, is its report that Rmb7.6tn ($1.2tn) of highly speculative ‘wealth management’ products were sold. As fellow-blogger John Richardson warned in December, these highly risky products have been key to sustaining China’s lending boom since 2009.
Their risk comes because they offer high short-term yield (up to 11%), but no capital protection. As China Daily has itself warned, they are essentially a Ponzi scheme where new deposits fund existing interest payments. And sales have doubled over the past 2 years as the lending bubble reached bursting point. Their total volume is now Rmb36tn – equal to 69% of China’s GDP.
What happens when (not if) these loans cannot be repaid? It really doesn’t take much imagination to set out the key Scenarios ahead:
• Base Case. The new leadership continues their current policy of trying to reverse course before these loans overwhelm the economy. This causes growth to temporarily slow or go negative for the next 2 to 3 years
• Downside Case. It turns out the policy change is too late. The economy is unable to absorb the level of bad loans, and the adjustment period is extended beyond 2 – 3 years
• Panic Case. The problems in real estate and elsewhere are so bad, the leadership reverses course and does one final stimulus programme
If you want to better understand the depth of the problem, please don’t take the blog’s word for it. Just read this Financial Times investigation and form your own judgement.
None of the above Scenarios are currently in most companies’ Budget forecasts for the 2014-2016 period. But they are far more likely to occur than the current consensus that with China, ‘all is always for the best in the best of all possible worlds’.