◎China will find it hard to sustain the economic “recovery” in April.
◎Risks of a stock market crash are greater than before.
Edited on April 18, 2019.
On April 12, the People’s Bank of China and the General Administration of Customs released economic data that exceeded market expectations. While some analysts suggested that the economic turnaround was due to seasonal factors, others believe that the Chinese economy is “rebounding” and “stabilizing.”
On April 13, PBoC deputy governor Chen Yulu said in a statement to the International Monetary and Financial Committee that China’s stock market, “which has seen a slack in the past few years, is showing signs of bottoming out and recovering.”
After the release of China’s Q1 2019 GDP data on April 17, National Bureau of Statistics spokesman Mao Shengyong said that “market expectations and confidence are strengthening.”
There appears to be a prevalent view that Sino-U.S. trade war has not beaten China’s economy. Some observers believe that the “worst has passed” for the Chinese economy and recovery is ahead. Despite the promising signs, however, major shareholders of public companies on the mainland continue to act as though the economy is going downhill, and not rebounding up.
The backdrop:
Q1 2019 economic data
- China’s GDP grew by 6.4 percent in the first quarter.
- National fixed asset investments grew by 6.3 percent from a year ago.
- Retail sales grew by 8.3 percent year-on-year.
- In March, China’s manufacturing purchasing managers’ index rose to 50.5 percent, a return to expansion range.
Q1 2019 financial data
- Total scale of social financing (aggregate financing) in China was 8.18 trillion yuan ($1.22 trillion) in the first quarter, an increase of 2.34 trillion yuan (+28.6 percent) from a year ago. Local government special bonds made up 7.81 trillion yuan of social financing, or an increase of 2.25 trillion from Q1 2018. Meanwhile, renminbi loans in Q1 2019 grew by 5.81 trillion yuan, or up 952.6 billion yuan year-on-year. The increase in RMB loans hit a new quarterly high and far exceeded expectations.
- M2 money supply in March grew by 8.6 percent from a year earlier, a 13-month high. Renminbi loans in March grew 1.69 trillion yuan, or a year-on-year increase of 577.7 billion yuan.
Q1 2019 import and export data
- Total value of Chinese imports and exports was $1.03 trillion, down 1.5 percent from a year ago. Exports made up $551.76 billion (up 1.4 percent YoY) while imports were $475.45 billion (down 4.8 percent YoY).
- China’s trade surplus was $76.31 billion, an increase of 70.6 percent year-on-year.
A-shares
- In March, 2.99 million new trading accounts were opened in Shenzhen, a 109 percent increase from February.
- The week of April 8 was one of the worst trading weeks of 2019 to date. The Shanghai Composite Index fell 1.78 percent while the Shenzhen Component Index fell 2.33 percent. Trading volume fell from over 1 trillion yuan on April 8 to 657.2 billion yuan on April 12, while market capitalization shrank by 1.2 trillion yuan over the week.
- The markets continued to fall on April 15 before rallying over the next two days (trading volume on April 17 only grew to 830 billion yuan).
- Since the start of the year, major shareholders (principal and majority) in over 700 public companies have reduced their stock holdings. According to data from Wind, major shareholders have dumped 11.867 billion worth of A-shares with a market cap of 100.6 billion yuan as of April 8. In comparison, major shareholders sold off 253.8 billion yuan worth of shares in the whole of 2018.
- On April 9, listed Chinese online gaming company G-bits released its annual report. According to the report, the company’s net profits for 2018 was 723 million yuan (up 18.58 percent YoY). The report also laid out plans for G-bits to issue 719 million yuan (99.45 percent of net profits) in dividends to shareholders at the rate of 100 yuan per 10 shares (as compared to 26 yuan per 10 shares in 2017), or a dividend ratio of 4.9 percent. G-bits’s top five tradable shareholders, who held 57 percent of the company, received 450 million yuan in dividends. Meanwhile, company major shareholder and actual controller Lu Hongyan received 216 million yuan with his 30 percent of G-bits shares.
The big picture:
The latest round of economic data comes amid extended Sino-U.S. trade talks and no obvious signs of recovery in China’s real economy.
Our take:
1. China’s Q1 2019 economic data might seem to indicate that the Chinese economy is “rebounding” or “stabilizing” thanks to government stimulus measures like the central bank injecting a record amount of liquidity in January. While government stimulus has translated into a technical “bull” market and rising property prices in the first quarter of the year, China’s real economy does not appear to have benefited from the liquidity boost.
We remain pessimistic about China’s economic prospects. Because credit growth is flowing to the financial and property markets, we believe that the risks of a stock market crash are greater than before.
2. China’s social financing growth in Q1 2019 was down to the issuance of more local government debt. And local government special bonds are mainly for infrastructure projects (or high-investment, low output ventures). In other words, the Chinese regime is resorting to an old and less sustainable tactic to drive economic “recovery.”
On closer examination, China might not see as much credit growth as reported if not for the central bank’s decision to include local government special bonds in counting social financing starting from July 2018. In Q1 2019, the increase in special bonds issuance accounted for 96.15 percent of the total increase in social financing. If special bonds were not counted, the growth in social financing would only be 5.93 trillion yuan in Q1 2019, or an increase of 350 billion yuan as compared to 2.34 trillion yuan.
According to an April 17 Xinhua report, 1.18 trillion yuan worth of new local government bonds were issued in the first quarter of 2019, or 85.2 percent of the bonds that the State Council had planned to issue for the year. Previously, the State Council had announced the bond quota for this year and made the bonds available for purchase in late 2018; typically, the State Council sets and gets approval for the year’s quota at the Two Sessions in March. In other words, the central authorities have limited ability to issue more debt to drive the economy after the first quarter.
3. Loose government monetary policy appears to be driving the current “bull” market in China, and the “bull” market has created opportunities for major institutions and shareholders to quickly “cash in” or “cash out” on their stocks at premium prices. For instance, the amount of shares sold by major shareholders in the first hundred days of 2019 is already 40 percent of the total amount of shares sold in all of 2018.
Meanwhile, several public companies have been issuing high dividends recently. Kweichow Moutai set a record by paying out 145.39 yuan per 10 shares, followed by G-bits (see backdrop) at 100 yuan per 10 shares. According to a mainland financial news report, 241 A-shares companies have a dividend yield of over 2 percent; 124 companies have a dividend yield of over 3 percent; 61 companies have a dividend yield of over 4 percent, and 30 companies have a dividend yield of over 5 percent. G-bits, which has a dividend yield of 4.9 percent, is ranked 33rd in China.
The above phenomenon indicates that major shareholders have no confidence in the real economy and are likely bearish on China’s economic prospects.
4. The central bank released “ample” liquidity in the first quarter. The increase in renminbi loans in Q1 2019 (5.81 trillion yuan) exceeded that of the financial crisis in 2008 (4 trillion yuan) despite the PBoC ceasing reverse repo operations from March 20 to March 31. The liquidity boost, however, may not sustain the good economic performance past March.
Despite increased liquidity and in the absence of significant reductions in foreign exchange reserves (China’s foreign reserves grew for five consecutive months), the PBoC’s balance sheet has been shrinking. In Q1, the central bank’s total assets decreased from 36.3 trillion yuan to 34.9 trillion yuan in Q1 2019 (down 1.4 trillion yuan). Meanwhile, claims on other depository corporations (the central bank’s loans to commercial banks) decreased from 10.7 trillion yuan to 9.3 trillion yuan (down 1.4 trillion yuan, or 13 percent).
There are two possible reasons why central bank assets are shrinking. The first reason is increased capital outflows. The second reason could be that commercial banks are unable to loan out the low-interest credit issued by the PBoC. Being unable to move the “ample liquidity,” the central bank is forced to reduce its balance.
Should the current trend hold, China will find it hard to sustain the economic “recovery” in April. The stimulus effect of increased liquidity may have hit a ceiling.
5. We believe that there are three likely reasons why China’s exports only grew by 1.4 percent from a year ago. First, U.S. importers are less keen on beating the tariffs now as opposed to when the duties were first levied. Second, U.S. importers have likely stockpiled on goods before the tariffs were put in place, and fuller inventories mean less demand for Chinese products at present. Third, many Chinese businesses affected by the trade war and China’s economy slow down placed workers on leave, laid off staff, or closed down in 2018.
We believe that the slower demand for Chinese goods will unlikely reverse in April even if a Sino-U.S. trade deal is reached. Also, exports may not pick up in the short term as Chinese manufacturers continue to struggle with the slowing economy.
6. In sum, we do not believe that China can sustain its “strong” first quarter economic performance in April and beyond. While the economy may continue “rebounding” should a Sino-U.S. trade agreement be reached in April, we believe that the benefits of a trade deal will only have a temporary effect in softening China’s economic downturn. Sharp declines could even be on the horizon.
Get smart:
Official economic data always serves a political purpose and tells only part of the story in China. Businesses, investors, and governments must look past positive sounding news headlines and juxtapose official data with other publicly available information to gain a more complete picture of China’s economy. Great risks lurk behind the Chinese Communist Party’s healthy-looking economic numbers.
