China's other growth fig­ure is flash­ing a warn­ing

The Pak Banker - - MAR­KETS/SPORTS -

Ob­scured by the fo­cus on the ac­cu­racy of China's growth fig­ures is a tum­ble in es­ti­mates for the econ­omy with­out ad­just­ing for in­fla­tion -- a slide that gives a clearer pic­ture of why the coun­try's slow­down has stoked ris­ing con­cern about its debt bur­den. Gross do­mes­tic prod­uct in dol­lars, un­ad­justed for price changes, rose just 4.25 per­cent in the fourth quar­ter of 2015 com­pared with the same pe­riod of 2014 -a gain of $439 bil­lion. Just two years be­fore, China added $1.1 tril­lion to the global econ­omy, ex­pand­ing 13 per­cent from a year ear­lier.

"Looked at in this way, fi­nan­cial mar­kets re­ac­tion to de­te­ri­o­rat­ing Chi­nese data is more un­der­stand­able," said Arthur Kroe­ber, the found­ing part­ner and man­ag­ing di­rec­tor at re­search firm Gavekal Drago­nomics in Hong Kong. Weak­en­ing nom­i­nal growth makes debt ser­vic­ing harder, form­ing the back­drop for moves this week by Moody's In­vestors Ser­vice to lower its out­look on China's credit rat­ing and HSBC Hold­ings Plc to cut its rec­om­men­da­tions on the coun­try's big banks.

With Premier Li Ke­qiang's cab­i­net hav­ing eased a delever­ag­ing drive last year, in­vestors will get fresh in­sights into the Com­mu­nist lead­er­ship's pri­or­i­ties at a gath­er­ing of the na­tional leg­is­la­ture start­ing Satur­day. Along with eco­nomic tar­gets for 2016, of­fi­cials will dis­cuss the party's new five-year plan.

While in yuan terms the slow­down is more grad­ual, the de­cline in nom­i­nal GDP gains is still dra­matic -- to a 6.4 per­cent pace at the end of 2015 com­pared with 10.1 per­cent back in 2013 and in ex­cess of 18 per­cent in 2010 and 2011. The slide high­lights the need to fol­low through on slash­ing ex­cess in­dus­trial ca­pac­ity, elim­i­nat­ing un­prof­itable en­ter­prises and revving up new driv­ers of ex­pan­sion.

"The big­gest prob­lem with plung­ing nom­i­nal GDP growth is that the cash-flow growth to the cor­po­rate sec­tor has de­clined at a time when growth in its debt ser­vic­ing has ac­cel­er­ated," said Vic­tor Shih, a pro­fes­sor at the Univer­sity of Cal­i­for­nia at San Diego who stud­ies China's pol­i­tics and fi­nance. "Be­cause debt is so much larger than the econ­omy, debt ser­vic­ing each year will still be two to three times the in­cre­men­tal growth of nom­i­nal GDP."

China's debt-to-GDP ra­tio surged to 247 per­cent last year from 166 per­cent in 2007, pro­pelled by a lend­ing binge in the af­ter­math of the global fi­nan­cial cri­sis. Days be­fore the Na­tional Peo­ple's Congress, the cen­tral bank this week low­ered the ra­tio of de­posits ma­jor banks must hold in re­serve, let­ting them de­ploy more in lend­ing.

Data re­leased Thurs­day sig­naled ser­vices strength mod­er­ated. The Caixin Me­dia and Markit Eco­nomics China ser­vices pur­chas­ing man­agers in­dex fell to 51.2 in Fe­bru­ary from 52.4 in Jan­uary. Read­ings above 50 sig­nal ex­pan­sion.

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