A financial professional, Chuck (Atsushi) Kawakami (pictured) recently reported that the peak out of the Chinese economy might be becoming clear. MIRUPLUS pick up his analysis as follows;
The United States and China, which have the highest and second largest GDP in the world, will follow the optimistic scenario that the market has woven into so far? As I've pointed out before, this is too optimistic. If I look closely at the current indicators, I have to be skeptical.
Especially for China, isn't the peak out becoming clear in a cyclical sense?
Looking at the relatively breaking news PMI (Purchasing Managers' Index), the recovery peaked out and showed a gradual decline, except for Caixin's service industry.
Consumer recovery as a pent-up demand pushed up retail sales levels from late last year to early this year, surpassing 2019 levels, but has since slowed and remained flat. Car sales also fell below the same month last year from May to July, and consumer prices rose only +1% year-on-year in July. Taken together, personal consumption can be seen as dull.
In terms of investment, fixed asset investment peaked out, and July was the negative (-0.4%) since March 2020 in a single month. In this way, the economic cycle may have come to an end.
Moreover, the debt problems of Chinese companies appear to be becoming more serious. According to some surveys, the default amount is higher than the pace of 2020 as shown in the graph as of June this year.
Individually, the risk of a large debt crisis has been reported. Evergrande Group in China is a huge real estate development company based in Shenzhen (consolidated total assets of 355 billion dollars / 38 trillion yen in 2020), but on August 5, S & P Global Ratings, each group company fell to CCC or below. Payment delays have occurred one after another due to huge debt, and the central government is requesting assistance from the Guangdong provincial government on the 12th.
This is perceived as a symbolic matter and has been widely reported in the U.S. and European media. In Japan's experience, it is new to remember that deflationary pressure increased in the process of disposing of non-performing loans after the bubble era, but China is no exception.
The balance of non-financial companies to GDP is 160% at the end of 2020, and the peak after the bubble in Japan was 149%, so China is in a situation where debt is slightly heavier than the economic scale.
It is clear that the People's Bank of China is maintaining and strengthening monetary easing, and that it corresponds to the economic situation and the debt situation of companies.
By the way, from the market perspective, both companies and governments are increasing bond issuance, but if the economic boom is good, the yield of Chinese government bonds should be stable, but it is actually declining. Coupled with the marginal rise in Chinese stocks, China's economic situation looks at the risk of a different situation than the optimistic scenario so far.
Chuck (Atsushi) Kawakami
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