5 Worries For Chinese Economy

From this Economic Observer article: 高层定调“半年报”：中国经济不容回避的五大隐忧
1. Where's the stability?

Chinese economy in the second quarter and throughout the first half can be stable overall, in line with expectations, and the emergence of some positive changes, not unrelated to exert macroeconomic policy. Force in the first half of the policy embodied in four aspects:

1. In February, May and twice cut interest rates again in March RRR;

2. Release the first half of the estimated 800 billion yuan scale special construction fund; (2015 NDRC arrange four batches of special construction fund 800 billion yuan in 2016 to 1.2 trillion yuan plan)

3. Decentralization and formation of large-scale infrastructure investments;

4. For loosening around the real estate market regulation policy, and thus caused by real estate investment and real estate market heating up.

Combinations of the above four aspects of the policy, and jointly promote the Chinese economy in a stable second quarter, and the emergence of local data better. This also shows the actual expansionary fiscal policy and relatively loose money supply, with large-scale state-owned enterprises led to do infrastructure projects, China is still the economic stability.

2. Hard to avoid and neglected concerns

The drop in fixed asset investment private fixed asset investment is a cause for alarm. Especially since some of the investment went for steel! (And I would add land sales and real estate...)

3. Increased debt defaults and rising NPL ratio

1 quarter of this year, the national commercial bank non-performing loans was 1.75% at the end of 2015 was 1.67%. There are estimates that this year in May, the national commercial bank lending has risen to more than 1.9%, and continued to show upward momentum.

4. Too much SOE fixed asset investment, rising credit growth

This year the total size of local government debt exchange as 5 trillion, the central arrangement of special construction funds expected to 1.2 trillion, in addition to more money for various causes reflux flow to state-owned enterprises or the financial system. This has led to much crowding out of private capital, plus, many private enterprises in debt default issue from time to time exposed, so bank loans to private enterprises more cautious. This unhealthy cycle, will lead to more difficult problems.

Central Bank data show that in May 2016, RMB loans increased 985.5 billion yuan, an increase of 9.40%. This year, the money supply continue to fluctuate, following the January hit a monthly amount of days 2.51 trillion of new credit, new credit beginning in February MoM significantly reduced new credit only 726.6 billion yuan in February, well below the market expectations. March new credit rebounded, reaching 1.37 trillion. New credit in the first quarter totaled 4.6 trillion yuan. Then in April new credit only 555.6 billion, a record low in 2016. May rebounded sharply again, new credit 985.5 billion yuan, exceeding market expectations.

5. Risk of European Black Swan

Expected policies and events for third quarter and second half:

According to the release of high-level signal, and the second quarter and the first half of the economic situation, we can roughly determine the trend of the second half of the economy and policy as follows:

1) global economic growth, weak demand constraints might continue to give the Chinese capital market and foreign exchange market uncertainty; capital outflow pressure is still larger.

2) With the renminbi officially joined the SDR, is expected to enhance exchange rate flexibility.

3) overcapacity reduction may exacerbate downward pressure on the economy, on the contrary will lead to further debt default cases rise, the bank non-performing rate rise.

4) output of summer grain situation and Southern Rain disaster could lead to some agricultural prices, and even become the subject of new capital speculation, thus affecting the CPI and residents.

5) investment decline in the situation is difficult to be effective in the short term change, private investment is even harder, which will further drag on the economy to stabilize in the second half.

6) real estate continues to the inventory, a second and third tier cities continue to divide. Real estate market continues weak recovery.

7) money supply stable, monetary policy easing but overall are steady, private capital will become a monetary policy point of support, but the actual operation of the market to be tested. At the same time, given the steady growth in demand, fiscal policy will continue to force.

8) reduce inventory, fill short board "three down a complement to a" supply-side structural reforms continue and persist in advancing, pains and regional differentiation pattern of industries and enterprises will continue.