China Overheating? Biggest Weekly Cash Drain in History; Questions Surface Over Chinese Growth Numbers

In December I suggested the modest bounce in China PMI would not last. It didn't. The allegedly sustainable recovery in China is already in question.

The HSBC Flash China Manufacturing PMI™ shows manufacturing conditions barely above contraction.

Key points

• Flash China Manufacturing PMI™ at 50.4 (52.3 in January). 4-month low.
• Flash China Manufacturing Output Index at 50.9 (53.1 in January). 4-month low

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The Chinese economy is still on track for a gradual recovery. Despite the moderation of February’s flash PMI, the index recorded the fourth consecutive reading above the 50 critical line. The underlying strength of Chinese growth recovery remains intact, as indicated by the still expanding employment and the recent pick-up of credit growth."

Questions Surface Over Chinese Growth Numbers

Those expecting China to be in some sort of sustainable recovery with Europe in a major recession and the US in a big slowdown if not outright recession are a bit delusional.

Please consider China’s Premature Overheating.

China began this year with an off-the-charts explosion in credit issuance. Last week, it broke records again, this time for the amount of cash drained from its banking system. The record credit issuance of 2.5 trillion yuan ($400 billion) in January — comprising both bank lending and non-bank financial institutions’ credit — always looked as if it was verging on the reckless.

The surprise perhaps is that this reversal came so early. The central bank withdrew 910 billion yuan from the economy via open-market operations last week, its biggest weekly cash drain ever.

This action coincided with warnings from Beijing for local governments to keep a tight reign on property-market speculation, amid fears of bubbles reappearing. On Friday, the government further extended its existing battery of property taxes to try to take the heat out of the market. The new measures target non-residential property and buyers of second homes.

In recent weeks, the Chinese capital has literally ground to a halt due to smog worsened by traffic and factories. Nomura says in a new report that pollution has got so bad, it may force policy change on the government, which will inevitably reduce growth in the short term. An unusual appendix in the report was a nationwide map of Particulate Matter (PM) readings.

 It has always been hard to square away China’s position as a low-cost manufacturing hub, while at the same time having some of the highest-priced real estate in the world. Some economists have an explanation: The numbers are plain wrong.

Standard Chartered Bank’s Stephen Green questions if China’s growth in 2012 might have only been 5.5%, even as the official figure was 7.8%.

And if China’s inflation has been running at a higher pace than we thought, reining it in could prove more difficult. How soon before investors need to worry again about what landing lies ahead for China’s overheating economy?

No one really knows the true state of China's GDP, but many of us do realize it's overstated, perhaps by a large amount. GDP is not a good measure of the true state of the economy anyway, with fiscal stimulus everywhere you look.

Realistic Outlook

• July 18, 2012: "China Rebalancing Has Begun"; What are the Global Implications? Michael Pettis on China Rebalancing, Chinese Price Deflation, and Spain Exit from Euro; Target 2 Revisited
 
• August 16, 2012: Pettis on Debt, Currency Wars, Commodity Prices and Capital Flight; China FDI Contracts 8.7% YoY, 8th Drop in 9 Months
 
• December 27, 2012: Michael Pettis on China Reforms, Ponzi Schemes in Wealth Management Programs, Rebalancing Implications

GDP aside, global rebalancing has just begun, and it may take a decade to finish. Expectations that the worst is behind us in China and in Europe is about to be shattered on the hard rocks of reality.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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