CHINA´S DELEVERAGING IS OVER / THE WALL STREET JOURNAL

China’s Deleveraging Is Over

Weak growth and inflation data make another ramp up in Chinese debt all but inevitable

By Nathaniel Taplin


The June purchasing managers index for Chinese manufacturers was weak on almost every front. Photo: aleksandar plavevski/Shutterstock 


For all its denials, Beijing is highly likely to put its foot on the gas pedal of the Chinese—and global—economy.

China’s job market is worsening, exports are sinking, and factory-gate inflation is at risk of going negative. The People’s Bank of China is adamant that a renewed ramp up in debt isn’t around the corner, but investors should view its assertions with a high degree of skepticism.

Nominal output growth, at 7.8% in the first quarter, is already running well below growth in the central bank’s own measure of total finance outstanding. Yet the economy is still weakening. Barring an ambitious trade deal, China’s “deleveraging” campaign will be on the back burner for quite a while.

The June purchasing managers index for Chinese manufacturers, released on the weekend, was weak on almost every front. Employment fell at the fastest pace in 10 years. New orders and output both worsened. But most striking was the steep drop in factory-gate prices: The PMI price index dropped nearly four full index points to 45.4. Numbers below 50 indicate weakening on the month.

What really looks bad in China right now is nominal growth, which is what matters for corporate revenues and debt servicing. Raw material costs also fell on the month but far less sharply, implying deteriorating margins. Moreover, shuttering excess factory capacity to boost sales prices—as China did in 2016 and 2017—looks risky, given the weakest job market in years.

As in late 2018, part of what is weighing on producer prices is a recent drop in global oil prices.

But the weakness also looks more fundamental this time. For the past two months, China’s PMI has shown output outpacing new orders by the widest margin since 2016, when industry was fighting off years of deflation. Output of some key industrial products like steel have also been growing more rapidly than investment in property, the main source of industrial demand.

All of this signals that demand is too weak to absorb production at current levels. Prices will fall further unless Beijing jump-starts the economy with additional stimulus or dumps excess inventories on global markets. Since another deflation-fueled industrial debt crisis is the last thing the Chinese government needs, easier monetary policy is surely coming.

Beijing recognizes that China’s debt problem is the biggest long-term threat to China’s growth.

It may pivot back to debt control in the future, should conditions improve externally.

Meanwhile, it is too busy putting out fires: More water from the monetary sluice—and another rise in indebtedness—is on the way.