China's economic data highlights the inevitable effects of the country's long-term addiction to easy money – the steady dissolution of its economic growth model.
The HSBC/Markit Flash PMI Manufacturing survey was released Thursday at 49.6, below economist estimates of 50.3. More importantly, the sub-50 reading also indicates an actual contraction in Chinese manufacturing activity.
China's economy is slowing faster than economists expected. The Citi Economic Surprise Index for China, which measures data reports relative to economist estimates (ie if a number comes in exactly as expected, the surprise index doesn't move) is in the midst of a rapid slide.
The chart below highlights the growing pressure on China's credit-led growth model. Before the financial crisis, credit growth (indicated here by year over year M2 money supply growth) and industrial production grew at roughly the same pace.
The Chinese government mandated a massive credit explosion in 2009 that saw credit expand at a 30 per cent pace. The easy money strategy was successful, boosting overall industrial production and gross domestic product.
Now, however, industrial activity and credit growth have both stabilized at problematic levels. Industrial production is stable around the 10 per cent growth level. But, credit growth is trending at a significantly higher 13 to 14 per cent pace.
In other words, China's economy needs more and more credit to sustain growth at lower levels. In addition, empty apartment buildings and an endless procession of corruption scandals are just two of many indications that new credit is not being allocated efficiently.
The HSBC/Markit PMI data released Thursday is only a preliminary reading, but there's little reason to expect better news when the final number is released on Jan. 29. Data should continue to weaken as more and more credit is allocated to fewer and fewer legitimate growth opportunities.
China industrial production vs China money supply (M2)
SOURCE: Scott Barlow/Bloomberg
The Chinese government mandated a massive credit explosion in 2009 that saw credit expand at a 30 per cent pace. The easy money strategy was successful, boosting overall industrial production and gross domestic product.
Now, however, industrial activity and credit growth have both stabilized at problematic levels. Industrial production is stable around the 10 per cent growth level. But, credit growth is trending at a significantly higher 13 to 14 per cent pace.
In other words, China's economy needs more and more credit to sustain growth at lower levels. In addition, empty apartment buildings and an endless procession of corruption scandals are just two of many indications that new credit is not being allocated efficiently.
The HSBC/Markit PMI data released Thursday is only a preliminary reading, but there's little reason to expect better news when the final number is released on Jan. 29. Data should continue to weaken as more and more credit is allocated to fewer and fewer legitimate growth opportunities.