Notes from China
Beijing Sees New Problems
We just conducted a week of interviews in Beijing and nearby Jinan, Capital of Shandong Province. A few thoughts on these subjects:
l Consumer Debt.
l Growing Receivables.
l New Private Banks
l Rising Power of Reformer Wang Yang
l The Mantra of Private Public Partnerships
Inflation in Beijing’s Sites
The head of the PBOC’s research office told a colleague of mine that inflation was one of his top concerns. The data confirmed a rise in PPI – not so much CPI. Inflation for materials has jumped from negative to plus 11.6% in one year; manufacturing inflation is up from negative to 7.5% in the same time period.
I also spoke to local firms and they agreed. A plastic pipe manufacturer in Jinan is struggling with rapidly rising costs, including 10-15% per year in labor. An online firm selling financial products is also seeing 10% plus increases in labor. A manufacturer of lighting for cars is experiencing rapid growth in labor and materials costs, but his margins have stayed flat as he is passing these on in higher prices. This, despite 20-30% in annual revenue growth.
If the leadership is aware of this, especially the PBOC, expect a curtailment in lending activity to forestall additional growth. It’s also possible programs aimed at production may be throttled back. These potentially could include the One Belt One Road policy, designed to export excess capacity, along with production slowdowns in steel, aluminum and other raw materials (which would be in conflict with the state’s environmental goals.)
Consumer Debt is Now a Beijing Problem
Beijing has been relatively quiet on China’s rising consumer debt. That’s changing. According to the PBOC researcher, it is now considered a significant problem. Does this mean China’s deleveraging campaign – pushing debt from corporates to individuals – is over? There’s been no indication of a slowdown. The data below shows consumer debt rising, with mortgages and home loans up 23 percent YoY in June 2017.
Rising Receivables Indicates Growing Corporate and Fiscal Weakness
We spoke to a manufacturer of plastic pipes for sewage systems. Receivables are stretching out to 12 months from six months previously. Some are taking as long as two years to pay. His customers are mainly local governments, but some of the receivables are fees paid by private clients for decorating expenses. The official data does not indicate that. We compared for 3000 Chinese companies between Q3 2017 and Q3 2016 and found an increase in the ratio of sales to AR, suggesting cash flow is improving. However, the Q3 2017 data may not yet reflect payment problems
Expanded Private Banks
Beijing is quietly licensing private banks. There are now five approved and operating and another five waiting in the wings. While their assets are relatively small, this is a surprising affirmation of incipient capitalism in a country that is touting state control. The total size and growth has yet to be decided so we don’t know if they will amass size over time. However, this could be an opportunity for foreign banks now that they financial opening policy has been formally announced.
Beijing’s Top Reformer – Wang Yang
Whatever reforms are coming out of Beijing these days – and there aren’t a lot – many are coming from Wang Yang. Wang is one of four vice premiers and was chosen at the 19th Party Congress to become a member of the Politburo Standing Committee. But his real baptism came as Party Secretary of Guangdong Province for six years until 2013. He was part of the renowned “Guangdong Model” of economic development (in contrast to the more rigid “Chongqing Model” under Bo Xilai) that encouraged free-market reforms at the grassroots level. (We won’t discuss the fact that Guangdong has one of China’s largest and best capitalized local government financing platforms, Yuexiu, that is busy shoveling state money into new companies.) A Beijing official who does financial research for the State Council noted, “Vice Premier Wang Yang has been pushing reforms under President Xi.”
The real question is whether his rise reflects real power or appeasement to the political factions in the south.
Private Public Partnerships
Along with “leveraging the consumer,” the other big economic policy mantra I hear frequently is Private Public Partnership. While it is viewed in Chinese policy circles as a way to develop China’s infrastructure and increase GDP through private funding, it has become a method of bypassing local debt limits and shifting the financial burden to consumers. That’s because many of these investments are securitized into WMPs and sold in the market. For the first nine months of 2017, 422 ABS were issued with a total amount of Rmb836bn, representing a 61% YoY increase .
We will delve into this in more detail in a separate report as this is a significant change in priorities.