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After the Fed tried to cause some more confusion with its decision to hike the interest rates by saying that a rate hike in June still is a possibility, we wanted to have a closer look at China which once again posted weaker than expected numbers.
We are very interested in all developments in China, as the country remains one of the largest net buyers of our favorite metal gold. Even though its economy is definitely growing at a (much) slower rate, the gold purchases haven’t been impacted, but the main question is whether these purchases are indeed to prepare the country for a total collapse of the financial system, or just to show the outside world the balance sheet of the central bank has some robust back-up assets that would allow it to print more money to try to support the economy.
Indeed, the Chinese export growth fell in April to a -1.8% YoY basis after seeing a sharp increase of in excess of 11% in March. Granted, the March-boost was very likely caused by the Chinese new year which resulted in a temporary export ‘stop’ during the new year, where after inventories were cleared out. So, okay, the lower export number didn’t really bother us that much, but what caught our attention was the fact the imports into China have been falling for 18 (!) consecutive months now which definitely is an indication of a crumbling domestic market.
That’s an important conclusion, and a first step in our central thesis in this article. Despite a declining export rate and a continuous freefall in the total amount of goods imported into China, the central government is sticking with its growth plan and wants to see the economy grow by 6.5-7% this year.
And that’s where everything is about to go completely wrong. There clearly isn’t a high demand for foreign products in China, nor is there a huge demand for Chinese products abroad, so the only way the growth numbers in the economy could be propped up is by making another giant flood of credit available. And now, several months (and even more than a year) since we started to warn about the Chinese problem, the data are finally confirming our suspicions.
Let’s have a look at the total debt in the Chinese economy (household debt + corporate debt + government debt).
Source: ABN AMRO
Yes, your first conclusion might indeed be there’s nothing wrong here as the majority of the debt increase has been the result of non-government credit expansion. But that’s another reason why you should never take any information or charts for granted, as China has quite a few government-owned companies, and the debt of those companies most definitely isn’t counted as government debt. Throw in the fact the Chinese household debt vs the GDP has more than tripled in the past 10 years, and you realize there’s a widespread bubble in all of the society’s layers.
Source: tradingeconomics.com
Of course, a 200% increase in the household debt to GDP ratio doesn’t sound too bad for a developing country, but keep in mind the GDP has also increased substantially. So whereas the net household debt was just $300B in 2006, this has increased to a stunning $4T as of at the end of 2015. That’s right, the amount of household debt in China has increased by 1233% in just 9 years. That’s an CAGR of 33.4% PER YEAR.
And then there’s one final chart we’d like to show, and that’s the investment growth in the country’s real estate sector. We have seen numerous reports about ‘ghost cities’, and it doesn’t look like the Chinese government is reducing the total investment in real estate and construction.
Source: ABN Amro
Indeed, whilst the private sector continues to slow down its investment in new real estate related projects, the government is stepping up the plate and has been increasing its investment sharply. Yep, we will see more and more ghost cities in China!
All in all, these charts explain why China has a serious problem at hand, and isn't capable to render enough autonomous growth to offset these issues. Throw on top of that the renewed strength of the US Dollar, and one can easily see that a new storm is brewing, with another (possible violent) Yuan devaluation looming on the horizon.
And perhaps that’s the reason why China continues to buy more gold, to make sure it has gold as a back-up plan to keep at least some of its credibility and creditworthiness. China added in excess of a million ounces of gold in the first quarter of this year, and continues to purchase gold month after month.
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