The most anticipated economic release over the weekend was the early glimpse into China’s manufacturing and non-manufacturing sectors via the two key PMI surveys released by China’s National Bureau of Statistics, to get a sense if the slowdown across China is stabilizing or, as some have suggested, rebounding. It did not: overnight the NBS reported that the manufacturing PMI remained unchanged in October at 49.8 missing consensus estimates of a modest rebound to 50.0, its third consecutive month in contraction territory.
As for the non-Mfg PMI a barometer of services and construction, while still in expansion territory (now that China is officially attempting to transition to a service economy), it fell to 53.1 from 53.4 in September, the weakest since December 2008.
Despite the clearly disappointing data, the spin was immediate: “The manufacturing sector is still contracting, though stabilizing,” and the report indicates economic momentum remains sluggish, Liu Ligang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong told Bloomberg. “We still believe the Chinese economy will experience modest rebound supported by faster infrastructure investment in November and December.”
A more accurate take would be to say that China’s continued monetary easing hasn’t yet boosted smaller businesses as much as their larger, state-owned counterparts, which are able to borrow at reduced rates. Perhaps it won’t: after all across the Developed World, ongoing QE, ZIRP and NIRP have now reached their point of diminishing returns (something even Mario Draghi admitted), so it just may be the case that ongoing easing by China will merely accelerate the exporting of deflation (and perpetuating the domestic misallocation of capital) in a world where currency wars are all the rage.
“Big companies are stabilizing, while smaller ones continue to perform below the contraction-expansion line,” Zhao Qinghe, a senior statistician at NBS, wrote in a statement interpreting the data on Sunday. “The percentage of small companies facing a financial strain is considerably higher than that of bigger companies.”
The NBS statistician forgot to add that in China virtually every “bigger company” is deemed too big to fail, as confirmed by the recent spike in corporate debt default bailouts by the Politburo. Because for all its posturing, China’s vocal forray into deleveraging from 2013 is now nothing but a fond memory.
Reading across the details of the PMI report, showed a pickup in the activities of the construction sector. The reading of new construction orders jumped by 5.5 percentage points to 55.1, signaling demand recovering, according to the NBS statement. Perhaps China has once again managed to reignite is housing bubble, which had burst since early 2014, and where for 17 consecutive months housing prices in more than half of China’s cities had declined. If so, expect the PBOC to care far less how the SHCOMP does over the next year as its primary goal, to rekindle the most important asset bubble for China, the one where 70% of China’s wealth is kept, i.e., housing, has been achieved for now.
But while housing may be rebounding, trade isn’t – new export orders showed declines in both PMI gauges, indicating the nation’s exporters are still challenged as they enter the final quarter of the year.
What was most troubling, however, was the ongoing deceleration in China’s employment market. According to Bloomberg, the employment gauges of both manufacturing and non-manufacturing sectors remained mired in contraction zone, Sunday’s report showed. China’s survey-based unemployment rate picked up slightly to around 5.2 percent in September, while a ratio of job supply and demand rose in the third quarter.
Ultimately jobs in China are, or should be, a far bigger concern to the Politburo than even the housing bubble: as we reported previously, as a result of China’s economic slowdown, suddenly jobs are becoming all too scarce. According to China Daily, competition for white-collar jobs became fiercer in the third quarter, with more than 35 job seekers contending for the same position on average. This is a jump from 26 and 29 in the first and second quarters this year, a Chinese human resources website said on Tuesday. As a further reminder, China’s official unemployment rate rose from to 5.2% in September, and is now at least on paper, higher than the US.
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But the most troubling aspect of the latest weak data is that it suggest s that China’s massive credit injection impulse – the one deus ex which had previously worked without fail if only on a short-term basis – is no longer working.
Based on a report posted last week by China’s wallstreet.cn, and translated by Chiecon, China’s state owned enterprises added almost 6 trillion yuan (around 1 trillion dollars) of debt in September, according to Luo Yunfeng, an analyst at Essence Securities, as “an unprecedented increase in leverage”. This means that not only is the government abandoning its deleverage policy, it is actually increasing leverage.
Latest Ministry of Finance data shows that by the end of September total SOE debt had reached 77.68 trillion yuan, representing a increase of 5.93 trillion yuan on August, and an increase of over 11 trillion yuan in 2015.
The report goes on to say that “with China experiencing slowing economic growth, and no turnaround on the horizon, its seems likely the Chinese government will continue to increase leverage. In September, China Merchants Securities stated that since Chinese government debt leverage ratio is still low, lower than the US, Europe and Japan, there is still more room for leverage.”
What happens next: Haitong Securities said at the start of the year that in order to prevent systemic risk the focus over the next few years will be on government leverage. Based on the experience of other countries, monetary easing almost certainly follows an increase in government leverage, with interest rates in the long term trending to zero.
Just as we explained in “How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable” because before the page is closed on the current monetary system, everyone will be monetizing debt, all $200 trillion of it, just to give the status quo a few last gasps of air.
