Private Fixed Asset Investment In China Is Crashing

We often think of liquidation events exclusively in terms of price, but in the real economy there is volume to consider. When financing dries up as financial agents run for cover lest they receive only further margin or collateral calls, it enacts a short run disruption in economic flow. At the margins, some firms are forced to delay activity while others can only give up altogether. It is difficult to figure how much in any liquidation is temporary and how much ends up as a permanent reduction.

The dramatic events of January and February all across the globe undoubtedly created just this kind of mix. As it ended around February 11, there was going to be some bounce back in economic terms as funding began to flow again, allowing delayed projects and activity to restart. Because of that, it wasn’t surprising to see certain economic accounts and factors seemingly improve especially in March. That did not mean anything other than the end of the liquidation crunch, as the baseline decay remains in place and, as we are finding out again, was only amplified by further reduced capacity during the liquidations – those projects and activity that will never be restarted.

As usual, this global process is most evident in China. Despite a burst of optimism especially in March statistics, the temporary part of the liquidation rebound is increasingly within view. Industrial production had jumped to 6.8% from a multi-year low of 5.4% in the January-February holiday combination and brought with it the usual “it’s all over” commentary. Instead, IP dropped back to just 6.0% in April which, like exports, suggests only what I propose above; a (very) brief respite only because the “dollar” hasn’t been as obviously stifling as it was to start 2016.

The same trend was recorded in Chinese retail sales as well, which is perhaps a bigger blow to March’s hopeful sentiment. Even economists have started to admit China’s industrial “miracle” may never be resumed so they have turned in near desperation to the idea of a “consumer driven” economy, as if there is some plan being carried out to replace the manufacturing/export orientation of the rising eurodollar period. This wishful thinking gained traction only because retail sales have decelerated at a lag to industrial production.

It is clear, however, through a wider perspective that China’s consumers are slowing just as China’s industry where “stimulus” can at best explain the delayed reaction. Even in 2016, the same pattern emerges as in manufacturing and export; retail sales were atrocious to start the year (Jan/Feb) at just 10.2%, nearly as bad as the worst of 2015, rebounding to 10.5% in March. The latest update for April is even worse than the Jan/Feb period, as Chinese retail sales slowed again to just 10.1%.

As bad as those end results are for the direction of the Chinese economy, the real bad news is buried in productive capacity. Where industrial production and retail sales may have picked up the temporary portion of the economy disrupted by liquidation, fixed asset investment (FAI) suggests the reduction in baseline economic reality might be even worse than feared. Private FAI is crashing in China.

Overall, total fixed asset grew 10.5% in April, down from 10.7% in March. Private FAI was just 5.2%, however, as it is clear the Chinese government is back to fiscal “stimulus” once again. The National Bureau of Statistics reports FAI in “accumulated” annual growth, which means the stated estimates for April include all months of the year through April. Since Private FAI was 6.9% to start the year but only 5.2% in April, actual growth in capex was less than that still. In other words, rather than rebound Private FAI has only slowed further into this year.