Where’s China’s Apocalypse?
Lost in the chaff, there is a revolution going on in China. At the urging of Prime Minister Li Keqiang, it is becoming a two-tier economy, with banks and economic planners pushing hard for the new high-tech economy in electronics, cars, high-speed rail and other new-economy sectors, while backing off on the behemoth smokestack industries that have characterized the economy over the previous two decades.
These smokestack industries, many of them state-owned enterprises, are struggling. There is proof of this in the latest numbers released over the past few days. For instance, the latest corporate results show the oil and gas industry, the second largest listed sector and synonymous with the energy-intensive “old economy” that Beijing is trying so hard to replace with an innovation-driven “new economy,” took a double whammy on both the top and bottom lines, shrinking by -5.2 percent and -11.2 percent annually respectively, during the first quarter. Metals and mining sales are down by 1.4 percent, profit off a whopping 68.2 percent
By contrast, the industries whose earnings are growing at more than a 30 percent annual clip include chemicals, electronic equipment, food products, cars, car components, media, trading companies – and Internet software, which soared upwards by an astonishing 246.5 percent on sales growth of 93 percent.
On the domestic front, Beijing has already stepped up pro-growth policy measures, with support for imports, improved export credits, expanded railway investment, more support for urban renewal through long-term bonds and tax relief for small and medium enterprises.
Property is the sector that has been causing most of the alarm, along with the shadow banking industry. Certainly there has been a downshift, with property developers, the fourth biggest sector by market cap, reporting relatively poor results as frenzied buying sentiment disappears. During the first three months of 2014, annual sales growth decelerated to a still healthy16.8 percent against last year’s 28.5 percent. Earnings growth did stagnate at RMB15.5 billion, flat annually 2013’s astonishing 20.8 percent surge to RMB109.1 billion. Difficult times for the real estate sector mean credit quality within the highly levered sector will diverge, pushing up default risk for the smaller players.
There are almost daily headlines like today’s that stir the bears, most of them concerning property. Guang Group, a top-100 developer, is rumored to be hear collapse due to housing delivery failures, with company officials admitting liquidity concerns. In Changzhou, officials are denying that affordable housing construction has been suspended. In Beijing, existing home sales are reported as declining, particularly in terms of large homes, with buyers remaining wary. But none of this portrays a market in crisis.
But the macro numbers that arrive on a regular basis continue to tell a story of an economy that continues to march along at the head of the global system. Li insists he is confident of meeting the government’s projected 7.5 percent annual gross domestic product growth rate, and now, more than four months into 2014, the figures continue to bear him out.
Key inflation continues to remain in check, with rising supplies of vegetables from warmer weather playing a major role in the Consumer Price Index, which rose only 1.8 percent annually in April, after managing a modest 2.3 percent for the first three months.
The latest Manufacturing Purchasing Manager’s Index report finds surveyed managers highly optimistic of the coming quarter, boosting their intake of production raw materials. Steel mills are reigniting their blast furnaces on surging new orders, propelling the steel PMI back above 50 percent for the first time since last August. The metallic sector PMI overall surged to 52.6 percent in April, a massive 8.4 percentage point jump from March, putting an end to a miserable first quarter
The signs are pointing in different directions for the domestic vs. foreign outlook. The forward-looking New Orders index gained for the second consecutive month to 51.2 percent while the New Export Orders and Import Indices retreated somewhat after bouncing sharply in March. Selected industries such as information technology equipment, pharmaceuticals, electrical machineries, and cement producers are among those with the most optimistic survey responses, according to official commentary, in line with superior year-to-date sales performance.
In trade, the very large distortions from the early 2013 trade figures that were kicked up by over-invoicing as exporters tried to sneak money back into China are coming to an end. Looking beyond trade through the Special Customs Supervision Zones, underlying foreign commerce is growing more briskly than most analysts expected with exports up 6.6 percent y-o-y while imports gained 6.2 percent in April. Both sides of the equation are quite solidly better than comparable figures for March’s +2.3 percent for exports and -3.2 percent for imports, respectively, propelling the second quarter off to a solid start. Crude oil and iron ore imports rebounded to near record levels.
Evidence of an epic shift in the mix of Chinese shipments abroad is continuing to unfold. Exports of general homegrown goods jumped 18.6 percent m-o-m to US$98.87 billion, significantly outpacing exports from labor-intensive processing trades using imported materials which gained a mere 2.4 percent from March to US$62.4 billion.
Exports of the traditional goods that built China’s export juggernaut, such as garments, textiles and shoes, continued to enjoy above-average growth in April. Interestingly, steel exports reached 7.54 million tonnes last month, just slightly shy of the record 7.68 million tonnes in August 2008. In value terms, that amounted to US$6.02 billion, a 22.3 percent annual rise.
After a brief pullback in February and a modest recovery in March, import quantities of crude oil and iron ore rebounded last month to near record highs of 27.88 million tonnes (+20.8 percent y-o-y) and 83.39 million tonnes (+24.2 percent y-o-y), respectively.
Commodities import data once again prove they are not contracting, but growing amid lower international spot prices and certainly due to resumption of industrial production into the summer. Iron ore average selling prices fell further to US$114 per tonne last month from US$130 in the Jan/Feb period. Average import prices for crude oil and copper also were lower on the month despite much larger import quantities.
We keep looking for danger. A recent report said nonperforming loans have been rising for 10 straight quarters. But the People’s Bank of China still expresses confidence that NPLs are under control. We continue to keep an eye on the economy on a daily basis. But we’ll bet the bears there’s no crisis coming.
Steve Wang is Chief China Economist and Research Director for REORIENT Securities Ltd. of Hong Kong and a regular contributor to Asia Sentinel