China: Highway to “L” shaped growth – Rabobank

Michael Every, Research Analyst at Rabobank, suggests that it was easy to spot the cyclical up-tick in China’s Q1 economic data but by April that uptrend was already being reversed: retail sales, fixed investment, industrial production, exports, imports, and M2 all saw y-o-y growth rates moderate again quite sharply.

Key Quotes

“That slowdown was despite a cumulative USD 1.4 trillion in new borrowing over January-April against ‘just’ USD 914bn in the same period of 2015, which should have produced a far larger – and longer – ‘bang’.

Adding to concerns was a cryptic 9 May editorial published in the People’s Daily based on an interview with a mysterious “authoritative insider”, presumed to be a high-level official. The key points of this text were that “Although the economy saw a good start in growth, a number of difficulties still lie ahead. These include overcapacity, bad loans, local government debt, a property bubble and illegal financing”; that high debt and leverage is the “original sin”; and that weak demand and overcapacity mean an “L-shaped” recovery is projected to last more than two years.

In short, there is no easy way for China to build its way out of its problems with yet more borrowing and infrastructure spending – though it certainly looks like it would like to try.”