$20tn US, China stimulus and lending – but recovery elusive

Financial Events


US ORDespite all the positive headlines, the world’s two largest economies have failed to deliver sustained recovery, even though the 2 governments have now spent a combined $20tn in stimulus and lending.

The US government and Federal Reserve have spent $10tn since the Great Recession began in 2008.  Federal deficits have increased by $6.27tn, whilst the Fed has spent $3.63tn on money printing.

Yet in the chemical industry – the best leading indicator for the overall economy – capacity utilisation (CU%) is still well below its average in the pre-2000 period, as the Fed’s chart above shows:

  • CU% was 76% in June and 75.9% in June 2013 – versus 80%+ in the pre-2000 period
  • And this was also despite the great benefit of low-cost shale gas in recent years

Recovery thus seems as far away as ever.  As the Wall Street Journal headlines:

“Forget about escape velocity. The U.S. economy in 2014 is likely to record another disappointing year of growth, according to the latest Wall Street Journal survey of economists….. And a new caution emerged in the July survey. When asked about an upside or downside risk to their forecasts, the respondents were evenly split. That is a sea change from the results of the six previous months. In each of those surveys, about 3 out of 4 economists thought the risk was that the economy would grow faster than their forecasts expected.”

And investment magazine Barron’s notes:

As for booming payrolls, we now have three months of data to demonstrate the gains are a function of increased part-time jobs, as companies look to eschew [the Affordable Care Act]. In June, 523,000 full-time jobs were eliminated, leaving full-time employment a stunning 3.4 MILLION below its pre-crisis level,” (Barron’s capitalisation)


China lend Jul14Across the world in China, the economy is also failing to perform.  We can ignore last week’s published 7.5% GDP figure – for as Premier Li Keqiang has noted, the data is “man-made and therefore unreliable”. 

A moment’s thought confirms this view.  How could China possibly collect all the data, and check it, within 2 weeks of the end of the quarter?  Equally, the fact that China never revises the published figure confirms its artificial nature.

This background also highlights how GDP is simply not a priority for the leadership, particularly at the moment.  It has much more urgent problems on which to focus, particularly the lending bubble as summarised in the chart above:

  • This has now reached $10.9tn, following the previous leadership’s stimulus efforts
  • Slowly however, this is being pulled back by the new leadership
  • Thus H1 data showed total social lending up just 4% versus H1 2013 at Rmb10.6tn ($1.7tn)

The first stage of the process is thus being achieved.  Growth in lending in the shadow banking sector (blue) is now slowing rapidly.  Instead, lending is being brought back into the official sector (red), where it can then be controlled

Of course, in the short-term. this means the data for official lending is larger than normal.  But to focus on this is to miss the wood for the trees.  Such data distortions are inevitable when trying to reverse the greatest credit bubble in history.

Other data confirms the real story is one of a fast-slowing economy.  Home prices fell in 55 cities in June, and the pace of falls increased.  At the same time, land sales also fell.

This slowdown is also exposing the massive corruption that developed during the easy lending period – with the latest examples uncovered in the ‘affordable housing’ projects.

As the blog will discuss tomorrow, one key area of growing importance is the ‘collateral trade’.  This is now emerging as a key battleground for the government.



The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
US$: yen, down 3%
Brent crude oil, down 2%
PTA China, down 1%.  Producers were operating at below costs, with several attempting to stem losses by factoring in cost-linked formulas into their pricing mechanism”
Naphtha Europe, plus 3%.  “A much anticipated summer demand for gasoline blending has evaporated on the back of a build in US gasoline stocks, while domestic petrochemical demand is unexceptional”
HDPE US export, up 7%. “China’s PE import prices were assessed as steady-to-soft, in line with softening of price offers heard in the domestic market. China’s PE domestic prices dipped on pressure from capacity expansions by a local producer.”
Benzene, Europe, up 8%. “With trading activity thin overall due to seasonal holidays, there was a sense of skittishness among many players regarding market direction in the coming weeks”
S&P 500 stock market index, up 8%



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