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Why Global Growth Hit A Wall: China Credit Growth Continues To Slow

QUICK TAKE: In short, our thesis is that city-level and regional macroprudential tightening policies in China currently will render economic growth in 2Q18, but more importantly 2H18, dismal; we believe this will spread to emerging markets, rendering the “global coordinated growth” bulls out of sync with reality. This, we believe, in turn, will weigh on metals prices, pushing many of the commodity pundits (i.e., Jeffery Gundlach) to reassess their bullishness. As this happens, we expect  steel/bulk exports out of China to rise (as profitability domestically falls with weakening domestic demand) pushing global bulk commodities prices lower.

Exhibit 1: China Total Credit Growth versus Bank Asset Growth, %Y/Y


Source: Peoples’ Bank of China (PBOC), Vertical Group.

Exhibit 2: It Appears Emerging Markets are no Longer “Feeling the China Love”


Source: Bloomberg, Vertical Group.

So how do things look at this juncture? Well, below we highlight the key takeaways from China’s April 2018 data dump. However, in short, looking at the below data in aggregate, we believe our thesis remains firmly intact; furthermore, in checks “on the ground” in China this week, we learned that the Consensus among domestic traders is that steel prices in China have “peaked” for the year as of this week.

GROWTH INTERNALS. As detailed below, while Y/Y industrial production growth edged higher to +6.9% in April 2018 (from +6.8% in March 2018), the all-important Fixed Asset Investment metric in China hit lows not seen in nearly two decades (at +7.0% Y/Y for April 2018 vs. +7.5% Y/Y in March 2018), while retail sales also dipped lower in the month of April at +9.4% Y/Y (vs. +10.1% Y/Y in March 2018). At risk of stating the obvious, at the margin, this suggests to us that China’s key growth internals are indeed slowing.

Exhibit 3: Growth Internals – China (FAI, Industrial Production, & Retail Sales)

…click on the above link to read the rest of the article…

Global Deflation Alert: Chinese Credit Creation Tumbles To 27 Month Low

Global Deflation Alert: Chinese Credit Creation Tumbles To 27 Month Low

At the end of November, we showed a troubling observation for China – and global – macro watchers from Axiom’s Gordon Johnson: for the first time ever, record Chinese credit creation had failed to stimulate the economy, and in fact the exact opposite appeared to be unfolding – economic growth is slowing across a number of data points despite massive new credit injected into the economy over the past year.

In economic terms, this meant that China’s credit impulse had hit rock bottom, and was perhaps at its lowest level ever, something UBS hinted at over the summer when it showed that no matter how much credit China creates, it can no longer keep the first derivative, i.e. impulse, surging at is had in the past despite record amounts of nominal debt created. Quite the contrary.

And while one can debate the definition of credit impulse, and its impact on the global economy, one thing is clear: China’s credit creation – the growth dynamo of the entire world – is rapidly slowing. We got the latest confirmation of this earlier this week, before last night’s battery of economic data which painted a very mixed picture of the Chinese economy, with retail sales missing, while IP and CapEx barely met expectations…

… when the PBOC reported November new loans of Rmb1.12Trillion and Total Social Financial of Rmb1.6Trillion. While on the surface both numbers appeared solid, beating consensus, a careful read between the lines showed some very troubling details which confirmed that not only was November not the upward “turning point” for monetary policy some expected it to be, worse, China’s credit slowdown was accelerating.

For one, adjusting for municipal bonds and equity raising, as Deutsche Bank did, showed that system credit growth slowed further to 14.4% yoy from 14.9% the prior month.

…click on the above link to read the rest of the article…

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