China is Australia’s biggest trading partner. They buy more of our commodities than any other country. Our economy has relied heavily on the Chinese economy doing well.
So next Friday, when China releases their second quarter gross domestic product (GDP) figures, you can expect wide media coverage.
The Australian already noted this week that the previous numbers were just a little too ‘rosy’.
‘A growing number of economists are stating that the 8.1 per cent year-on-year growth China’s National Bureau of Statistics announced for the first quarter of this year was suspiciously rosy, even by the generally unreliable standards often ascribed to those statistics.’
It’s worth questioning the GDP results. After all, this is a country which produces a quarterly GDP result within two weeks of the quarter ending. Other countries, like Australia, can take up to three months to report our economic growth.
You have to wonder how a country of more than one billion people can announce a GDP result so quickly…
In fact, Chinese Vice Premier, Li Keqiang has been quoted as calling China’s GDP result ‘man-made’ and ‘for reference only’ in a Wikileaks cable. So if the Middle Kingdom’s own insider doesn’t trust the official numbers, what does he follow?
The three he feels best represent the Chinese economy are electrical consumption, freight volume and disbursement of loans.
And two out of three of these indicators are pointing toward Chinese economic growth slowing…
Chinese Electrical Consumption Expanded by 5.8% for May 2012
Overall Chinese electrical consumption was up 5.8% in May. Which should be good news, right? After all, growth is growth?
But it’s only when you start to break down the numbers that you see how much the Chinese economy is sputtering.
The overall consumption figure is comprised of the following: primary, secondary, tertiary and urban and residential consumption.
Primary industry is the agricultural side of the Chinese economy, accounting for 3% of total electrical consumption. And tertiary industry, which is the services sector of China’s economy, makes up 12% of all electrical needs. Then there’s 12% for urban and residential.
And secondary industry?
Well that comes from China’s mining and manufacturing industry…and accounts for a massive 73% of all electrical consumption.
Let’s have a look at how all of these separate categories are consuming electricity…
Both tertiary and urban and rural consumption achieved over 10% growth for May.
But the sector of China’s economy that consumes the largest amount of power, mining and manufacturing, barely eked out 3.8% for May.
And ‘growth’ was well below the previous two years.
Freight Volumes Drop in the Chinese Economy
But the bad news for the Chinese economy doesn’t end there.
Another one of the Vice Premier’s economic indicators, cargo freight, is trending down. Most economists tend to look at the purchasing managers index (PMI) to determine how healthy the manufacturing sector is. It’s an indicator of new orders, inventory, levels of production, supplier delivers and employment.
So why does VP Keqiang look at cargo, or freight volume, instead? Simply because it tells him how much stuff is actually being transported for export.
And all isn’t well for the freight sector. Volume is heading south…
Freight Volume increased by 3.6% for May
Freight volume was 3.6% higher from January to May this year. Yet it’s still less than half of the 2011 average. This is a huge drop.
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Overall lending was 16% higher in May, but that comes mostly as a result of the bank’s three reserve ratio requirement cuts.
Also, most of the new loans written went to government and state owned infrastructure projects. But that doesn’t mean the loans are going to anything the country actually needs.
This is why the Vice Premier uses loan disbursement as a more accurate gauge of lending activity. Called ‘total social financing’, other ‘senior’ Chinese officials feel this measurement better correlates with the Chinese economy’s growth.
Social financing includes bank deposits, bank loans, off balance sheet lending, and money raised through bond and equity markets. While there was 18% growth in total social financing to 1.14 trillion yuan for the month of May, overall deposit growth slowed to 11%. That is the lowest figure in 12 years.
For now, there is still growth in lending and deposits. But should growth in deposits stop, the central bank of China will have to cut the reserve ratio requirement even further to encourage banks to lend more. But that’s a cycle that can only go on for so long.
One person prepared for a slowing Chinese economy is Greg Canavan, editor of Sound Money. Sound Investments. He is convinced China is actually the next stage of the financial crisis.
This weekend, he releases a special note to readers about how to prepare for and survive the coming China crash. Keep an eye on your in-box for the report.
Shae Smith
Money Weekend
The Most Important Story This Week…
When you ‘short’ a stock, you are betting on the price going down. You sell a stock at a certain price and hope to buy it back at a lower price. The aim is to sell high, buy low. That way you can pocket the difference. The risk you run is the price of the stock rising instead of falling. Eventually you have to buy it back. If it’s more than you sold it for, you’ve lost money.
Traders and hedge funds short stocks all the time, but most retail investors don’t. But short selling is an important concept to understand because it can drive trends in the market. When short sellers want to get out of their positions, they have to buy the stocks they’ve ‘sold short’ back. The market can rise. A naïve investor can think stocks are rising because things are improving when they’re not.
Slipstream Trader Murray Dawes thinks it might be happening right now. Don’t be fooled – a big drop in the share market might be coming. See what Murray says in Did the European Summit Change the Market Trend?
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John Stepek on Investing in the Indian Economy: Your Best Bet of the BRICs Right Now: “The grouping together of the BRICs countries (Brazil, Russia, India and China) was always more of a crafty marketing slogan than anything else. But while everything was rising together, it was easy enough to just lump all the emerging markets into one big group. Today, you need to be more discriminating.”
