Storing up trouble

With the release of the ‘flash’ PMI for China, a further setback has been suffered by the eternal Polyannnas who expect a recovery to emerge miraculously – if not this month, then the next…or the next…or the one after that – from the ruins of the overleveraged, crony-ridden Behemoth which has long been the world’s predominant guzzler of marginal increments of hard inputs—and, in some cases, the only one— since the collapse of the pre-Lehman global bubble.

But, for the Ming-vase-half-full crowd, such disappointments contain their own silver lining in that they must, inexorably hasten the day when the inscrutable Titans at the head of the Politburo finally unleash a torrent of ‘stimulus’ upon the world, sweeping the whole chorus of carpers and cavillers – who have the temerity to doubt that a dirigiste economy can possibly fail to show up the inadequacies of mere capitalism – headlong into the abyss in its wake.

Lacing this presumption with a delicious irony, we even enjoyed the spectacle of one of the Fed’s most woefully insistent pump-primers, Chicago’s Charles Evans, pleading with his hosts in China to do what his wing of the Fed still seems unable to pull off against the internal forces of reactionary dissent and ease policy indiscriminately.

We should not wish to give the ineffable Mr. Evans too much direct credit for the event, but it was nonetheless significant that the official People’s Daily immediately chose to publish a prominent, front-page editorial on the economic outlook – one, notable indeed for its bleak, ‘backs-to-the-wall’ overtones – in which it pronounced that:

…while emphasizing the sense of urgency, the aim is to keep a clear head, to fully understand the economic programme, as well as the potential problems, difficulties and risks it entails. It can not be considered that, in the pursuit of the stabilization of economic growth, the most difficult period is over. Nor can one believe that the goal of ensuring price stability has been attained and that policymakers can now sit back and relax. Neither should we assume that, in the key areas of macroeconomic regulation and reform, the measures so far taking have fully borne fruit.

With other editorials trying to reassure the public that the ongoing rise in agricultural prices will somehow NOT lead to any untoward pressure on their weekly food bill; with crude oil prices up 25% in recent weeks to regain their post-Libyan mean; and with property prices again rising after the last, baby-step, monetary relaxation, perhaps we should take the underlined passage seriously. We may all know that ‘inflation is a monetary phenomenon’, but if a drought half a world away leads to rising pork prices in Shenzhen, it will not sit well with Mrs. Wu if the PBOC is seen to be acting to make this worse in the attempt to bail out the high-livers among its SOE buddies.

Adding to the poor impression created by the PMI, the mainstream press – both at home and abroad – has been an unusually rich source of tales of Chinese woe, not least those focusing on the steel industry and thus homing in on that bell-wether of the moment, the iron ore price.

So parlous has the situation become that, as Reuters reports, Chinese steel mills have either defaulted on delivery of, or deferred shipment on, cargoes amounting to four million tonnes of iron ore this month, The bulk of this – equivalent to the load of 24 capesize vessels, the agency points out – have found their way into a spot market which, the reader might recall, did not really exist a year or two back, until the big mining houses greedily noted that their traditional insistence on longer-term contracting meant they were missing out on the premiums then in place for immediate receipt amid the boom.

Alas and alack! Some potential buyers are now said to be so bearish that they are demanding spot discounts of $10-$15 from index-based prices.

“It is very worrying. They are asking for far bigger reduction in prices when they try to inquire for material,” a Hong Kong-based trader told Reuters.

One common feature of the press coverage has been a repeat of the sorry meme, common enough in Whenzhou last year, whereby smaller concerns and private individuals have woken up to find that the local steel magnate – previously happy enough to offer them high, double-digit interest rates on the company cash reserve or family nest egg – has had it away on his toes, as they say.

“Most private steel mills are short of capital now, as prices of steel products keep declining and sales keep shrinking,” a Tangshan-based steel mill owner told the Global Times. “The current situation is even worse than the economic crisis in 2008, and many private steel mills will go bankrupt in half a year if the industry gloom continues.”

Adding to the gloom, many steel trading companies were also deemed to be on the verge of collapse.

“Most… are small, privately owned companies, and some are involved in private lending,” Qu Xiuli, deputy secretary-general at the China Iron & Steel Association, told the same paper which also pointed out that the larger companies were hardly immune to the effects of the downturn, citing reports that one of them, the Guangzhou Iron & Steel Enterprises Group, had ‘delayed’ repayments of over 3 billion yuan in bank loans.

“Companies in the steel sector should be prepared for a long-term depression,” Zhang Changfu, secretary-general of the CISA, told media earlier.

Strange then, that the official data for July suggest that Chinese steel output hit a new, all-time high of 61.7 Mtonnes during the month, the YOY increase of 2.5Mt making up no less than 99% of the entire global increment over the year. Why on earth would this be?

Chalk it up to moral hazard – specifically, the same, zombifying belief shared by the whole motley of Sinomaniacs, Draghi queens, and QEasers everywhere that bad news equals good; that, in true Orwellian fashion, ‘WEAKNESS IS STRENGTH’ – that any shortfall in voluntary demand will elicit a large enough crank of the printing press handle that the glut will soon be removed from the market and so obviate the need to undertake any painful restructuring, or to quit the business and release scarce resources for use by those with a genuinely viable business plan.

Take the comments from the same Mr. Qu cited above: “Maybe in the fourth quarter, when the government’s supporting policies start to show some effect, companies will be suffering less from capital pressure.” Yes, maybe…

Listen to Wu Weiqing, the manager of a faucet and sink wholesaler, who told the NYT that his sales had dropped 30 percent in the last year, causing him to pile up extra merchandise as the factory upstream from him carries on regardless.

My supplier’s inventory is huge because he cannot cut production — he doesn’t want to miss out on sales when the demand comes back.

Back in the metal-bashing business, Wang Lei, the head of a Shandong ore trading company, bemoaned the current adversity, telling Caixin:

If you had iron ore [last year], you could hold it for a couple months and then sell it and earn $20 to $30 per ton easily. We bought ore for about $135 per ton, but no one will take it, even if we try to sell at a loss.

Wang and his friends appear to have drawn a dangerous lesson from the events of 2008-9 though. As he told the magazine, Wang remembers watching the value of his company’s inventories decline rapidly in 2008 until the price bottomed at US$ 60 per ton the following year.

When the ore price fell, he reminisced, he and his fellow traders were not pessimistic because they correctly assumed that the Chinese government would step in with an economic stimulus to offset the crisis and so revive demand. Sure enough, as the boom progressed prices soared, reaching close to $200 a tonne in 2010, a level they revisited some 18 months ago, before policy began to tighten and the long slide to sub-$100 began.

So, once bailed out, always bailed out seems to be the guiding inference. Meantime, close your eyes and pray.

One potential outlet for all that steel is, of course, the automotive industry. Sadly, this, too, is not without its little local difficulties. Sales to dealers are up some 9%, or  600,000 units, so far this year, ostensibly a reasonable outcome. Unfortunately, most of that seems to have become stuck in the showroom, prompting discounting of up to 30% on what the press calls, with unconscious humour, many ‘popular’ models.

Dealer inventories are said to have risen 900,000 in the same period (i.e., by more than ‘sales’), swelling to around $5 billion in notional worth and pushing days-sales being carried up to 54 days across the whole industry and up to an eye-popping 98 days for the highly disfavoured local brands – the same ones whose owners are said to be planning to add capacity equivalent to the entire existing Japanese car making plant over the course of the next three years. Confirming this slump, government tax revenues on end-user purchases are, in fact, down on the year.

Presumably, this will all be made good when those budding entrepreneurial geniuses at the local government level start doling out in earnest some of that cumulative CNY7 trillion (sic) they have promised to expend in order to restart the economic miracle.

The only slight quibble here is that they do not seem to have anything like the wherewithal to make good on such grandiose boasts.

A week or two back, the story broke that shopkeepers in the north-eastern city of Shenyang were refusing to open for business for fear that a horde of local officials was about to descend upon them with the aim of levying all manner of fines and various ‘administration fees’ with a view to plugging the hole in the town budget. Similar action spread from there in Liaoning province to Shangdong and Wuhan, too.

In Shuangliao, a business owner told the New Tang Dynasty Television service in New York that these officials were ostensibly checking to see whether the goods on display were counterfeit or not, but were nevertheless finding excuses to impose charges on those selling legitimate products, too.

“If something is said by the inspectors about not meeting the standards and all kinds of requirements, then they really fine you,” the merchant said.

Caixin reported that the inspectors were exacting harsh penalties for what appeared to be trivial violations of sanitation and safety codes, while a human resources executive from a Wuhan media company related her personal experience on the local Twitter variant, Sina Weibo:

I arrived in Shenyang this morning, couldn’t find a taxi out of the airport, so I had to take the bus. During the bus ride, five people working for the anti-counterfeiting bureau got on to inspect the bus. They said my iPad was a counterfeit, so I showed them my sales receipt from the Apple Store in Tokyo, but they insisted that the receipt hadn’t been notarized by the Consulate, so it was invalid, and tried to confiscate my iPad. I argued strongly, but ended up paying them 1,000 yuan.

Another user declared that: “The old grandpa at the street stall selling tofu got fined 10,000 yuan – that’s 10,000 pieces of tofu – how many months will he have to stand there to make up the losses?!”

The Epoch Times (which organ, we must confess is not much disposed to painting the Chinese authorities in any sort of favourable light) quoted the opinion of one Wu Fan, Chief Editor of China Affairs, to the effect that:

“Tax revenue, fees and fines have become the most convenient ways to generate income. “As the economy continues to deteriorate, local governments will most likely push for more fine-writing campaigns in the second half of the year.”

The Xiaoxiang Morning Post revealed the policy scam of Shaoyang City, Hunan Province has been to employ large numbers of ‘sanitation inspectors’ – less favourably termed ‘chengguan’ –  to enforce traffic laws and – with more than a backward glance at the tax-farming practices of cash-strapped anciens régimes of history – were said to be allowing these proud public servants to keep up to 80% of any monies raised, despite the apparent illegality involved in perpetrating such a patently corruptible scheme.

In response, He Qinglian, a prominent Chinese dissident economist, fulminated on her Twitter feed:

“Tell me, everyone, is this a group of bandits, or a government? In the Republican Era the bandits at least knew you had to raise the chicken to take its eggs; they discussed the rents they would take, and they protected local business. Now the government has become bandits protected by the law.”

Indeed, Madame He, as the inimitable H.L. Mencken wrote long ago: “Government is a broker in pillage, and every election is a sort of advance auction in stolen goods”.

As Caxin summed it up in typically aphoristic Chinese fashion: one falling leaf is indicative of the coming of autumn. It then cited the words of the Governor of Guangdong Province who apparently informed a meeting convened last month to discuss the economic situation that “…the downward pressure is larger than expected. Weaker investment, consumption and exports – all of the troika – are facing greater difficulties than in 2009 when the international financial crisis broke out…”

Leaving our titillation at all these signs of tales of malfeasance aside, the important point is to ask ourselves whether, if all this local colour really is representative of the current state of local finances, it can be in any way sensible to attach any significant expectation to the possibility that such bodies will easily come up with sums amounting to 30% of GDP in order to keep the teetering plates of systemic malinvestment spinning on their bamboo poles, like the hackneyed conjurers they are.

If the answer is no, the iron ore traders and the steel stockpilers, the palm oil hoarders and the copper rehypothecators of the world might yet be forced into a firesale before the year is out.

That matters are now moving rapidly beyond redemption can be seen from an official government report which revealed that, during the first seven months of this year, Chinese industrial profits (for companies with annual income on major businesses of at least 20 million yuan) fell 2.7% YOY and that they dropped 5.4% YOY in July alone (that latter percentage eerily mimicking the rate of decline in nationwide rail freight which, belying the official ‘growth’ tally of 7.2%, has contracted in a manner reminiscent of the one experience during both the Asian Contagion and the GFC itself).

Even this was not the worst of it, for those same firms’ accounts receivable were up 15.4% over the same horizon (many of them owed to indigent local authorities, as well as to equally hard-pressed suppliers and customers who all purport to guarantee one another’s obligations according to the practice of what is known locally as ‘triangle debt’). This meant that their yuan increment was therefore equivalent to no less than 39% of those supposed ‘profits’ – with the total of this uncollected cash now representing more than 57 days’ worth of sales, versus the typical US or European figure of 35-40 days. A separate, private study of over 1,000 listed corporations showed, if anything a worse situation, with receivables up a massive 45% in their first half-year reports – enough to account for the entirety of their reported earnings.

It may be that more than leaves which are falling across the Middle Kingdom as the chill winds of the new season whistle through its forests of half-finished apartment blocs and its ugly undergrowth of jerry-built highway projects.

More from Sean Corrigan
The BoE’s very own monetary crank yank in full spate
Beyond the QE2 adventure – FT Alphaville Make no mistake, the right...
Read More
One reply on “Storing up trouble”
  1. says: Paul Marks

    I have no real knowledge of China – so I am not going to comment on it.

    But as for the United State and rest of the West……

    If these silly people really believe in their own (absurd) docrines, they should LITTERALLY “print money and throw it from helecopters”.

    Oh but of course, just printing money and throwing it out at random would not benefit the banks (and other connected special interest) so that will never do.

Comments are closed.