Re <<China>>
Our invited guest for dinner at home last night is the head of Asia / China of global consulting firm and the person noted all well in China macro economy even as domestic consumption sluggish but still growing, due to caution and whatever else
Factories are very busy
Having noted the anecdotal, and I see the Bloomberg report below, I ask myself, "what is there is a decoupling of credit and growth in China, and that growth begets growth irrespective of credit conditions as long as such remain in normal-space (~3%) as opposed to at adventurous 0% or outrageous negatives?
bloomberg.com
China Growth Decouples From Credit, With Global Implications
Tom Hancock
18 June 2021, 17:00 GMT+8
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Chinese manufacturer Lou Zhongping is being bombarded with offers of new loans from banks and government officials, attention that he says is finally coming to smaller businesses like his own.
“A lot of financing companies have been contacting us wanting to invest and help us develop more quickly,” said Lou, whose company Soton Daily Necessities Co. Ltd., supplies drinking straws to retailers like Starbucks Corp. “The financing environment is the best it’s ever been.”
Lou’s experience suggests that even though China is putting the brakes on credit expansion in the economy, that doesn’t have to signal slower growth in the economy or demand for commodities. That’s because the traditional link between credit and growth is not as strong as it once was.
Foreign demand is playing a key role in the economy this year as a pandemic-fueled export boom is set to continue. Domestically, more financing is being funneled to private-sector businesses like Lou’s, while service and technology companies -- which require less credit to expand -- make up a bigger portion of the economy.
Some economists argue that credit has even decoupled from investment in the heavily indebted property sector as business models change.
Credit DrainChina's credit growth has continually slowed after a pandemic peak
Source: Bloomberg Economics
Note: The credit impulse is the change in new credit issued as a proportion of GDP
China watchers look at the “credit impulse” -- which measures the growth in new financing as a share of gross domestic product -- as an indicator of business cycles. China’s property developers, manufacturers and local governments depend on new credit for investment, driving up employment and demand for imports of industrial goods and commodities.
That in turn creates a global industrial cycle correlating with everything from Australian GDP to the strength of emerging-market currencies. U.S. Treasury bond yields tend to rise and the S&P 500 falls in tandem with the Chinese indicator.
The credit impulse peaked late last year and has been declining since as Beijing seeks to taper its pandemic stimulus. Here’s a deeper look at why that doesn’t necessarily mean a slowdown in the economy.
Private SectorChina’s central bank last year provided a surge of funding for banks specifically earmarked for lending to small and medium enterprises. Official and independent data show that has significantly raised the share of credit flowing to such companies.
That matters because privately-owned companies are generally more efficient than state competitors in the same sector, so their investment results in bigger increases to the economy’s productive capacity.
Credit BoostChinese private-sector reports an improvement in financing conditions
Source: Cheung Kong Graduate School of Business Business Conditions Index
Note: Based on survey of around 300 mostly private companies. A value above 50 means that the variable that the index measures is expected to increase, while a value below 50 means that the variable is expected to fall.
Services and TechThe economy has shifted over the past decade from a reliance on heavy industry and investment to services and technology, referred to as “new economy” sectors. The share of services in China’s GDP reached nearly 55% last year, up from 45% a decade earlier.?
Service companies typically need to spend less on investment in fixed capital like equipment, and there is evidence that, like many other places, the pandemic accelerated a digital shift as more services moved online. The share of economic output that depends on digital technology reached nearly 40% of GDP in 2020, up from about 33% in 2017, according to estimates from Goldman Sachs Group Inc.
“The impact of credit growth on China’s growth cycle has faded in recent years as construction, the most credit intensive sector, is no longer the key source of demand drive,” said Li Cui, chief economist at China Construction Bank International.
“The decline in credit intensity means Chinese commodity demand will change in its mix. Those related to construction, such as steel, will grow modestly but those related to manufacturing upgrading and green economy, such as copper, are still strong,” she added.
Profits and Equity FinanceChinese companies can also expand in ways that don’t show up in official credit measures: they can issue equity or use retained earnings. Money raised from listing on stock exchanges in China almost doubled last year from the previous year, according to PWC.
An examination of listed companies shows that those in “new economy” sectors, such as health care, renewable energy and semiconductors, had a smaller decline in income than those in “old economy” sectors like mining infrastructure, materials and real estate during 2020. Profit margins for new economy sectors also increased. That allowed for a 16% surge in capital expenditure among listed new economy companies, according to analysis by Natixis SA.
New EconomyCapital spending by China new economy companies surged in 2020
Source: Natixis
Note: Data compiled for China's top 3000 listed companies by asset size
China’s technology giants illustrate the trend: they are ploughing profits earned last year into expanding their businesses.
“Faster profit growth and lower leverage mean the new economy has larger room to expand capital expenditure than the old sectors,” said Gary Ng, an economist at Natixis. That will help China increase long-run productivity, meaning that “the decline of potential growth in China can be delayed with a higher share of the new economy,” he added.
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Venture-capital funding has also risen sharply in China since the second half of last year, which benefits fast-growing companies, like Guiyang-based autonomous driving startup Pix Moving. The company’s founder, Angelo Yu, said “it’s really difficult for early-stage startups like us to apply for a bank loan,” yet the business raised several million dollars from venture capital investors last year.
Property and SavingsReal estate investment is one of the main drivers of China’s growth and has traditionally been dependent on debt-financing. Beijing has tried to rein in the property market since 2017, concerned that the sector diverts resources away from more productive uses and creates financial risks.
In response, China’s real estate giants have sharply increased their reliance on pre-sales of apartments.
Advance SalesChina property developers raise more funds from pre-sales than loans
Source: China National Bureau of Statistics, Absolute Strategy Research
Note: chart shows 12-month trailing sum of property developer funding sources
“The link between credit growth and housing starts had already broken,” said Adam Wolfe, China economist at Absolute Strategy Research. “That means the most credit-intensive sector in the economy is less sensitive to the credit cycle.”
Beijing has tightened credit access for property developers even further this year. But that might do little to interrupt sales as wealthier Chinese households amassed extra savings last year as they stayed at home, which remain available to be spent on property.
Local governments also have savings from unspent bond issuance last year, available for spending on commodity-intensive infrastructure projects. And if just a fraction of household savings are spent in the next few months, there could be a noticeable boost to GDP growth, said Freya Beamish, China economist at Pantheon Macroeconomics.
“In the current circumstances, I’m less worried than normal about slowing credit and money growth,” she said.
— With assistance by Coco Liu
(Updates with new figures from Goldman Sachs.)
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