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How Much Stimulus Can Beijing Deliver?

Despite signs of a slowdown, it is unclear how much action China's policymakers will feel able to take...

IT WAS announced last week that Beijing is reversing an earlier decision to allow local governments to issue their own bonds, writes Sean Corrigan for the Cobden Centre.

This led to eyebrows being raised everywhere among the skeptics who may also have noted that the Chinese Index Academy were reckoning that the latter's crucial revenues from land sales were some 38% lower in the first half of this year, on a national count, with declines in the capital and Shanghai suffering drops of up nearer 60%.

In a classic sign of policy confusion, it was also reported that the authorities were simultaneously giving tacit encouragement to the banks – which are otherwise struggling to hit their fatally-conceited, top-down targets for loan growth – to make up some of the resulting shortfall, as well as launching a $14 billion bond under the auspices of the MOF in order to raise funds for these stalwarts of misplaced spending and crass Keynesian malinvestment.

Meanwhile, Tao Zuojin, head of the China State Shipbuilding association, vouchsafed that up to a half of all his members might go bust within the next two years, reeling under a 60% decline in the gross tonnage of orders (90% of yards are said, in some quarters, to have won ZERO orders so far this year) as global economic deterioration compounds the widespread glut of maritime freight capacity and the lessened availability of cheap credit continues to haunt a sector largely expanded during the super-stimulus years.

Granted, the problem is not just confined to China – the global trade and resource rebound has suckered in all too many from outside the Middle Kingdom, too, as can be attested by the fact that 60% of the world's dry bulk fleet has an average age of little more than three years, with deliveries scheduled this year likely to expand the fleet by around a sixth, even after scrappage is taken into account. 

But matters have come to such a pass in the earthly capital of Schactianism that Shanghai Shipping Exchange president Zhang Ye told a regional industry forum that the state might not only soon require all cargo to be carried by domestic lines, but that all their vessels might have to have been built in Chinese yards, too.

Whether this resurrection of the infamous English Navigation Acts of the seventeenth and eighteenth centuries is truly a matter of official study – one shudders at the implications for world trade were so nakedly protectionist a measure to be enacted – it does show how desperate the situation has become for it even to be floated as a trial balloon.

Across at the local steel mill, things are not much better, with YTD losses rising appreciably from the same time last year to leave the businesses who pour half the world's alloy with their already slender profits cut in half, stranding the group as a whole with a knife edge 0.1% operating margin and a decidedly sub-inflation ROA of just 0.6%. The worst third of them, all in the red, were actually left nursing a combined income gap of $2 billion, substantially higher than the losers' tally this time last year.

If you think it might be important – not just to users of steel, but to diggers of dirt in the iron ore and metallurgical coal game – whether there is any immediate prospect of achieving an acceptable real return on capital in this moiety of the global industry, you should perhaps ponder on the fact that, since the comparable, pre-Crash semester in 2008, China's steel production has risen by fully one-third (total capacity stands perhaps another 35% in excess of that), while the rest of the world has trimmed its output by some 5-6%. 

In other words, it is not just true of oil that China's ill-advised crash stimulus package has been responsible for a share of incremental consumption much greater than unity in the past four years, but for materials associated with this particular destruction of capital, too.

Nor is business exactly humming in the thermal coal market, either. Indeed, the storage facilities at Qinhuangdo in Hebei province – the world's largest coal terminal and one responsible for one-half of all China's import needs – came perilously close to overflowing, with the peak stockpile of 9.5 million tonnes registered in mid-June representing 93% of the port's total capacity and standing two-thirds higher than the seasonal average. Across the country, the total estimate which Li Xin of the China Coal Transportation and Distribution Association gave to the China Times was a mountainous 300 million tonnes – equivalent to 3-4 months' imports and one month's total consumption.

For reference, steel stockpiles are said to stretch to 12 million tonnes – up 35% since the start of the year – with dockside iron ore inventories not far short of 100 million tonnes – or around 7 weeks of imports.

Citing weakness in the electronics, machinery, and transport sectors – as well as an absence of major government outlays – state researcher Antaike lowered its estimates for domestic copper consumption growth to 5% in the current year. Elsewhere, it was reported that cement production had only risen 4.4% yoy in May (a gain of 5% in the first five months as a whole) with that of flat glass slumping 10.2% to depress the YTD total to a scanty 1.7% gain versus a 19.6% rise in the corresponding period in 2011. Needless to say, businesses in the first are seeing profits tumble by 50% or more, while those in the second are collectively in the red.

Is it any wonder that Deputy Director Shao Ning of SASAC – the body charged with oversight of the major SOE's – said that these coddled giants should be girding their loins for 'the next three to five years (sic) of winter conditions' by striving to 'strengthen their basic management practices… attaching great importance to cost reduction and enhancing  efficiency… Increasingly a matter of life and death in times of austerity and contraction…  central enterprises must fully understand the gravity and urgency of the current situation, and devote attention to being able to survive …'?

All in the price, the optimists say, but we – with our Austrian theories of boom and bust reinforcing our admittedly far less expert reading of the political tensions at work – are not so sure. Those expecting another massive monetary infusion should bear in mind that a PBOC survey of Beijing residents showed last week that an increased majority of 73.1% of respondents said that prices of goods were unacceptably high and that almost half of them feared a 'surge' in their prices over the coming quarter – a pessimism largely rooted in the Bank's recent interest rate reduction, one suspects.

Whether or not such anxieties are well-grounded, their currency will not allow the policy-makers to place too much faith in the idea that the ongoing fall in the official CPI index will, of itself, be sufficient to give them room to conduct any grand, counter-cyclical maneuvers in the coming months.

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Stalwart economist of the anti-government Austrian school, Sean Corrigan has been thumbing his nose at the crowd ever since he sold Sterling for a profit as the ERM collapsed in autumn 1992. Former City correspondent for The Daily Reckoning, a frequent contributor to the widely-respected Ludwig von Mises and Cobden Centre websites, and a regular guest on CNBC, Mr.Corrigan is a consultant at Hinde Capital, writing their Macro Letter.

See the full archive of Sean Corrigan articles.

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