China (PRC)

The balance of good news vs bad news about the global economy reached its most positive point since November 2015 during this week, led by a sharp recovery in data from Asia, particularly China. In addition, the news from the world’s capital goods industries, which are usually taken as a lead-indicator for the business cycle, also turned positive. It is ironic that this turn for the better has arrived at exactly the same time as the IMF is raising the risk-flags for potential global recession.Asia: The uptick in Asia’s economic news is now the sharpest seen in any region, with China, Japan and the rest of Asia all now producing more surprises to consensus than shocks. This week, it was China’s turn to spring the most surprises, with financial, industrial and investment data all stronger than expected. Also unexpected, however, is the upturn in economic news from Australia, where the improvements in the broader economy defy the continuing stress in the mining sector.

US: The news from the US continues to be equivocal, but tending towards the negative. In fact, the signals from March’s economy are broadly negative, with industrial output down 0.6 percent mom, retail sales down 0.1 percent, and both consumer and corporate sentiment indexes sagging. But the sustained strength in labour markets continues to surprise.

A bad week for Europe’s data, with Eurozone industrial production falling 0.8 percent mom, and a series of grim-but-unreliable data releases from the UK on inflation, retail sales and the housing market. On the other hand, trade data from the Eurozone reported a full rebound in February from January’s weakness.

Three key surprises
China bank lending & total finance; China industrial production; China urban investmentChina financing loosens broadly
Friday 15th April

March’s financial data confirmed the financial loosening signalled first in January is continuing, and broadening beyond bank lending. The broadest measure showed an additional Rmb2.34 trillion in new financing being added in March, one of the strongest additions of recent years, and 89 percent more than in March 2015. Bank lending rose by Rmb1.32 trillion, which was only modestly more than one expects in March, and resulting in the loan book rising 14.7 percent yoy. But in addition, a further Rmb 699 billion of new finance was raised in corporate bond markets, which was by some distance the largest monthly total ever raised in China’s bond markets.

During the first three months of 2016, there was total new financing amounting to Rmb6.54 trillion, which compares with Rmb4.64 trillion in 1Q15.

That Rmb6.54 trillion in additional new finance is also equivalent to 41.2 percent of total nominal GDP generated during 1Q. There are two observations to make about this, and one consequence.

Such an open-handed financial policy does make an immediate impact on the economy. This was obvious from the details of the 10.7 percent rise in urban fixed asset investment seen during January-March. In March itself, investment jumped 11.2 percent yoy, but with private sector investment rising only 4.9 percent yoy whilst public sector investment jumped 23.4 percent. It’s not surprising, then, that the parts of the economy which saw the biggest jumps in investment are also those in which the state plays the biggest role: public facilities +31 percent ytd, water production +26.8 percent and power & heat +20.6 percent. Manufacturing, meanwhile, rose only 7.3 percent ytd.

China industrial production
Friday 15th April • China March industrial production surprises +6.8 percent yoy
– Monthly gain is very slightly above historic seasonal trends
– 1Q Output +5.8 percent yoy, vs 5.9 percent in 4Q15
– Drivers: autos +11.4 percent yoy, pharma +11.2 percent, electric equipment & machinery +9.4 percent, non-metal minerals +9.8 percent
– Drags: iron & steel smelting/pressing +3.3 percent yoy, power & heat +4.1 percent, agricultural food processing +4.7 percent

China urban fixed asset investment
Friday 15th April

• China January-March urban fixed asset investment surprises +10.7 percent ytd
– Implies investment +11.2 percent yoy in March
– Private investment +5.8 percent $ ytd and +4.9 percent yoy; implies public sector investment +19.9 percent ytd and +23.4 percent yoy
– Primary industry +25.5 percent ytd, tertiary industry +12.6 percent, secondary industry +7.3 percent only
– Drivers: public facilities +31 percent ytd, water production +26.8 percent, power & heat +20.9 percent
– Drags: iron & steel mining down 18.1 percent ytd, smelting/pressing down 3.1 percent, petroleum/gas down 40.3 percent
– Manufacturers: electrical equipment & machinery +14.7 percent ytd, telecoms/computers +13.4 percent

Three key shocks
Japan bank lending ; US industrial production ; US consumer sentiment

Japan bank lending ex-shinkins
Tuesday 12th April

In late January, Bank of Japan announced it would levy negative interest rates on those deposits commercial banks keep with the central bank. The idea was, presumably, that the threat of such a punishment would persuade banks they were better off taking the risk of lending to their customers rather than simply building their cache of idle deposits in the central bank. After the carrot of zero interest rates proved insufficiently effective, it was time to take out the stick.

The move seems to be backfiring. In February, lending fell 0.3 percent mom, which was 0.7 standard deviations (SDs) below what one normally expects in February. In March it got worse. March is the end of Japan’s fiscal year and brings incentives to ginger up corporate accounts which, in turn, means that it is usually the second-largest month for bank lending, after December. Usually banks’ loan books grow by 0.5 percent mom in March, but this year they rose only 0.3 percent mom, which was 1.7SDs below historic seasonal trends. This was the largest monthly deflection below trend since December 2011, and cut the yoy to just two percent yoy, the slowest since April 2013.

The pain is most obvious in Japan’s largest commercial banks, the city banks, whose loan books grew just 0.1 percent mom, cutting the yoy to 0.7 percent, down from one percent in March. City banks account for 47.5 percent of Japanese bank outstanding loans.

What’s going on here is, in retrospect, quite easily understood. Banks are anxious to avoid building up deposits because, if they lodge them with Bank of Japan, they will incur the fine of negative interest rates. There are two principal ways to avoid this: first, a bank can simply refuse to accept deposits, which is difficult to do without fundamentally alienating your customers. Second, since one of the two major engines of deposit growth is loan growth, one can simply stop creating new financial assets – one can stop lending. This, it seems, is what is now happening.

In the short term, it is difficult to know what the larger economic impact will be. Corporate Japan has been cutting its net debt almost continuously since the mid-1990s, with its net debt/equity ratio falling from 175 percent in 1995 to 49 percent in 2015. During the last two years, corporates have held more cash and deposits in banks than they owe in short-term debts to the banks: by the end of 2015 this surplus amounted to Y21.4 trillion. One assumes, therefore, that banks’ reluctance to lend will not be a great inconvenience to the corporate sector. Rather, the stress is likely to be felt in housing markets and the consumer sector.

However, in the longer term, it is impossible to imagine that banks refusing to lend can be anything but negative for inflation, for nominal GDP or for corporate profitability. At the back of Bank of Japan’s massive monetary stimulus package of the last couple of years has been the quiet assumption that since Japan’s commercial banks no longer have an appetite to buy or create financial assets, the central task of allocating capital just fall ever-more-directly on the central bank itself. The impact of negative interest rates brings this underlying institutional crisis into the open.

US industrial production
Friday 15th April • March US industrial production shocks down 0.6 percent mom and down two percent yoy
– Manufacturing down 0.3 percent mom, utilities down 1.2 percent, mining down 2.9 percent
• March US manufacturing production disappoints down 0.3 percent mom and +0.4 percent yoy only
– Motor vehicles down 1.6 percent mom; manufacturing ex-autos down 0.1 percent
– Durables down one percent mom: electrical equipment down 1.7 percent mom, motor vehicles down 1.6 percent, fabricated metal products, wood product both down 0.6 percent
– Positive offsets: computer & electronics +0.9 percent mom, furniture +0.7 percent, primary metals +0.4 percent
– Non-durables down 0.1 percent mom: plastics & rubber down 0.7 percent mom, clothing/leather, paper, printing all down 0.6 percent
– Positive offset: petroleum & coal +one percent mom

US Uni of Michigan consumer sentiment
Friday 15th April

• US April Uni of Michigan consumer sentiment prelim shocks down 1.3pts to 89.7
– Weakest since Nov 2014
– Current conditions down 0.2pts to 105.4, weakest since Nov 15
– Expectations down 1.9pts to 79.6, weakest since Sept 15
– Gloomier: business outlook down 3pts to 101, h’hold finances down two pts to 117
– Cheerier: ‘continuous good times’ up two pts to 102

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