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China’s Stimulus Programs Ineffective; Manufacturing Slowdown Continues

According to a key industry metric, the Chinese economy has failed to revive itself from a stretch of laggard underperformance, largely due to a sustained manufacturing slowdown and a dysfunctional banking system.

For the month of April, the Purchasing Manager’s Index (PMI) from HSBC Holdings PLC and Markit Economics was 48.3, a slight upward move from March’s 48. In an analytical note reported in Bloomberg, Zhang Zhiwei, chief China economist at Nomura Holdings, said, “We do not believe that this uptick in the HSBC PMI signals any sort of turning point for the economy and continue to believe that growth momentum is on a downtrend.”

The PMI reading indicates that a basket of government stimulus programs have failed to overcome a combination of diminished domestic consumption and a manufacturing slowdown. According to Qu Hongbin, an economist at HSBC, “Domestic demand showed mild improvement and deflationary pressures eased, but downside risks to growth are still evident as both new export orders and employment contracted.”

In March, the Chinese government implemented a coordinated set of measures that promoted railroad construction, cut taxes on small businesses and and rebuilt dilapidated villages. Economists have been closely scrutinizing China’s financial data for signs of recovery or any evidence that a series of governmental interventions has begun to take hold. Given the limited effects of fairly aggressive stimulus programs, many experts have grown anxious that the contracted growth is a feature of deeper, more systemic problems like multiplying defaults, a broken credit system and mountains of toxic loans, or inefficiencies created by bureaucratic graft. On the government’s website, Premier Li Keqiang said, “Some large projects should be launched this year to help stabilize the economy, change the structure of energy consumption and change the growth model.”

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The consensus solidifying among experts is that China’s debt, and its dysfunctional “shadow banking,” is more beleaguered by troubles than generally thought. In the last several years, Chinese growth is largely fueled by the accumulation of credit, which, over the last five years alone, is approximately equal to the monetary value of the entire U.S. banking industry. China’s total debt as a percentage of GDP, a key metric for gauging a country’s fiscal health, ballooned to 220 percent from just 130 percent in 2008.

China’s household and corporate debt have simultaneously skyrocketed, from a manageable 120 percent of gross domestic product to an unsettling 170 percent, not including debts still owed by financial companies. By way of comparison, the U.S. experienced a massive credit boom that saw a leap from 143 percent in 2001 to 177 percent in 2008. Japan, too, underwent similar transformations leading up to its virtual collapse in 1989.

A variety of specialty financial products have permitted China’s banks to continue robust lending policies despite regulatory attempts to dampen their enthusiasm. And it’s not always clear the banks don’t actually operate with their implicit imprimatur. Jaspal Bindra, Asia chief for Standard Chartered, said, “The shadow banking thing has been both known and blessed for a long time. Then I think that people have taken to a point where it’s been abused.”

It’s almost impossible to determine how much of China’s credit is generated by this “shadow banking” system given that so many loans are dispensed hidden from publicly accessible balance sheets. But the concern about these loans are no longer clandestine. Bindra noted, “They were very aware and very public. It wasn’t a whisper in my ear or a secret or something. They were probably telling everybody who visited them to make their point that they know what is happening.”

In response to the news of China’s PMI reading for April, the yuan fell 0.1% to 6.2435 per dollar, the lowest level it has experienced since December 2012.