Monday, 17 August 2015

China as seen in the latest IMF report: a chart and thoughts cornucopia

The latest IMF report on China released late last Friday is worth a read (link here).  Of course many will focus just on the forward GDP estimates / statistics...

...but actually far more interesting insights can be found from the range of charts in the rest of the report which often stretch way beyond just the pure GDP statistics/estimates, especially as the report was based on a visit to the country which concluded during July i.e. before all of the yuan volatility and related news hit the wires.  

A few charts that struck me in particular: 

The general government balance is fine...but the real deficit issues are when you add local / off-balance sheet factors.  

And this makes a real difference regarding the relative position of the Chinese borrowing position versus an international peer group: 

Not that many times over the last decade when investment contribution to growth has out-stripped that of consumption.  So the latter overtly taking over is a real regime shift if it occurs. 

Not too many times over the last decade that the real exchange rate went negative year-on-year - hence the surprise factor re last week.  
If you are going to worry about any aspect of the Chinese housing market then basically the lower the property tier the more you should worry:
Domestic microeconomic/supply side reform (such as boosting consumption versus investment) comes at a cost in terms of shorter-term growth levels.  Over the medium-term however it makes sense - and improves growth:
Yes, Chinese shares did get a bit ahead of fundamentals like corporate profits...

Meanwhile credit to nonfinancial corporates remains high versus country peers at a similar level of development...
 ...and interest coverage ratios continue to compress.  Feels very much like a stock picking market:
Remember all that angst post the yuan downward shift last week in other Asian currencies?  Well interesting China does run a deficit against the ASEAN/NIE countries...
 ...and undoubtedly this is due to the country going up the curve in terms of the goods they are producing (plus generally becoming more domestic consumption centric). The currency evolution is not materially about trying to scrabble this back...
Some conclusions?  If we did not know if already then watching debt levels in China is all important with - versus my previous knowledge - the level of nonfinancial corporates interest coverage (or lack of a level) particularly striking.  A pro consumption shift is still both likely and reasonable but there will be transitional issues as the economy evolves.  Finally the above charts again reiterate that the yuan shift was nothing to do with regaining export capabilities in 'old' goods and much more to do with growing liberalisation shifts (with the tactical benefit of boosting the economy a little at the margin).  

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