When China transitioned to a new currency regime midway through last month, the PBoC triggered a veritable meltdown in emerging markets.
Make no mistake, part of the carnage was due to the fact that by devaluing the yuan, Beijing was effectively robbing the world of export competitiveness at a very precarious time. Fears that a weaker yuan would put upward pressure on regional REERs while further dampening onshore demand exacerbated an already tenuous situation across EMs, and in at least one case, forced the abandonment of a currency peg.
Having said that, the yuan devaluation was perhaps more significant for what it telegraphed about China’s economy. That is, the yuan had appreciated by some 15% in REER terms in the space of just 12 months, and the fact that Beijing hadn’t gone the nuclear devaluation route (i.e. had “merely” resorted to multiple policy rate cuts) was seen by some as an indication that perhaps the economic situation wasn’t as bad as many people feared. The devaluation effectively crushed that theory and indeed, there are some indications that behind the scenes, China is targeting a devaluation on the order of some 20% which would have the effect of adding back 20 percentage points of export growth on the way to - hopefully- resuscitating output.
On Sunday, we got still more evidence to suggest that China’s economy isn’t growing at anywhere near the clip the official figures suggest as industrial production came in light of expectations and FAI rose at the slowest pace since 2000. Here’s WSJ:
The data released Sunday pointed to continued weakness across large swaths of the world’s second-largest economy, heaping more pressure on the government to seek to further stimulate activity.
“This is very disappointing data,” said ANZ economist Li-Gang Liu.“It’s very difficult to see Premier Li Keqiang getting his 7% growth target this year.”
China’s industrial production grew 6.1% year-over-year in August, according to the National Bureau of Statistics. While this was marginally faster than July’s 6.0% level, it compared with an already very low reading in August of 2014 and fell well below a median 6.6% forecast by 12 economists in a Wall Street Journal survey.
Fixed-asset investment in nonrural areas of China rose 10.9% in the January-August period compared with the year-earlier period. This was also below expectation and slower than the 11.2% increase recorded in the January-July period.
Amusingly, even the NBS was cautious about the outlook going forward:
The statistics bureau warned of continued headwinds. “The foundation for the recovery is not solid,” it said on its website. “External and internal demand for industrial products remains weak and industrial production still faces relatively big downward pressure.”
And here’s a bit more color from Bloomberg:
“The economy is showing no sign of recovery," said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “From the perspective of monetary policy, the government has done what it can, but demand from the real economy needs to pick up to really make use of that.”
The weakening economic figures underscore the challenge the government faces in meeting its growth target of 7 percent this year, as exports decline and producer price deflation deepens.
Investment in real estate development rose 3.5 percent in the first eight months of the year, down 0.8 percentage point from the January to July period. That reading was less than a tenth of the pace during the same period five years earlier.
Of course none of this should come as a surprise. Comparing China's headline GDP prints to individual data points betrays the extent to which Beijing is quite clearly fabricating the numbers. Here, courtesy of RBS, is a chart which vividly demonstrates the disconnect:
And here's a look at FAI components:
As Alberto Gallo notes, "investment cannot go on forever without demand" and indeed, excess capacity in China is one of the main reasons why the global economy is careening headlong into the deflationary doldrums.
As for what happens when China eventually goes through an inevitable capital stock "adjustment," well, let's just say that if Daiwa turns out to be correct, our projections will look generous by comparison...