China’s industrial output is contracting at the fastest pace since the depths of the global financial crisis, with knock-on effects spreading across the Far East.
“It just keeps getting worse,” said Alistair Thornton and Xianfang Ren from IHS Global Insight. “The government has underestimated the pace of the slowdown and is behind the curve.”
The HSBC/Markit manufacturing index for China fell to 47.6 in August, the lowest since the onset of Great Recession in late 2008. Inventories are rising. The index for new export orders fell to the lowest since March 2009. “Beijing must step up policy easing to stabilise growth,” said Hongbin Qu from HSBC.
China’s official PMI manufacturing index – weighted to big companies – also fell through the contraction line of 50, though services are holding up better.
Evidence of a hard landing over the summer is becoming clearer. Rail volumes fell 8.2pc in July from a year before. The Japanese group Komatsu said its exports of hydraulic excavators to China – a proxy gauge for Chinese construction – fell 48pc in August from a year before.
The twin effect of China’s downturn and Europe’s double-dip recession has turned into a full-blown shock for much of Asia. Hong Kong and Singapore both contracted in the second quarter and are probably in technical recession.
South Korea’s exports fell 6.2pc in August, with car sales down 18.2pc. India’s exports fell 14.8pc in July, an extra blow as it grapples with its own post-boom hangover. “The coming days ahead are tough,” said Indian commerce secretary S R Rao.
Stephen Jen from SLJ Macro Patrners said we are starting to see Phase III of the global crisis as “the eye of the storm moves East”, with China and emerging markets succumbing at last to the effects of debt leverage.
Mr Jen said markets have already discounted any likely trouble in Europe and America, but have yet to “price” the mounting risks in Asia correctly. “There seems to be a big gap between the prevalent view on China, and what is likely to happen: the sanguine consensus view that China can do no wrong will likely be proven to be incorrect,” he said.
Jim O’Neill from Goldman Sachs said the Chinese government will “surely step in” if the calibrated soft landing slips control. The central bank has kept monetary policy tight to keep a lid on property prices and rein in rampant loan growth, up by almost 100pc of GDP in five years.
The authorities cut the required reserve ratio for banks in May to 20pc – still very high by global standards – but have refused to ease further despite ever louder pleas for action from the markets. Governor Xiaochuan Zhou opened the door to monetary loosening last week, saying a change in the reserve ratio was “still possible”.
China’s regions have unveiled vast infrastructure and stimulus projects over recent weeks with the blessing of the Politburo, but it is unclear how these can be financed. Beijing-based media group Caixin reports that Beijing, Shanghai and other cities already face a “budget crunch” as land-sale receipts fall sharply.
Local governments have $1.7 trillion (£1.07 trillion) in debts through 6,000 arms-length vehicles, described by Cheng Siwei from Beijing’s International Finance Forum as China’s “sub-prime” crisis.
The state-run banks can clearly crank up lending if told to do so, but Fitch Ratings says the law of diminishing returns has already set in, with each extra yuan of debt generating less than half a yuan in extra growth.
Overdue loans at major banks jumped 27pc in the first half of the year. The steel industry alone has $400bn of debts.
China will have to steer a delicate course, offering just enough stimulus to keep the show on the road without reverting to the dangerous excesses of the last five years.----
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