Local Debt Risk Contained
Fixed asset investment increased 9.2% y/y in real terms in August, reaching its lowest level since this cycle of investment slowdown. Industrial output was up 6.1% y/y, but price-adjusted actual growth was even lower. The PMI index published by the National Bureau of Statistics shows August PMI at 49.7%, down 0.3 pps from July, the first time it’s fallen below 50% for a half year. We expect industrial output to remain low, if the government doesn’t actively use fiscal and monetary instruments.
Retail sales of consumer goods were up 10.8% y/y in nominal terms, up 0.3 pps from July, but price-adjusted growth was relatively constant m/m. Prices for the producer and consumer sides are diverging. CPI was up 2% y/y, has been constantly increasing for three months, and was up 0.8 pps from May. In August, the ex-factory price index fell -5.6% y/y, and the PPI fell -6.6%.
Both exports and imports plunged in August. Exports in dollars fell -5.5% y/y, down 2.8 pps from July. Imports fell -13.8% y/y, down 5.7 pps. Both declines were closely linked to economic slowdown.
On August 25th, the People’s Bank of China cut its one-year benchmark interest rates for deposits and loans by 0.25 pps, in a continuing effort to respond to the slowdown. At the end of August, the broad money supply, M2, was up 13.3% y/y, flat on July. But M1 rose 9.3% y/y. M1 growth has been speeding up for two months, and was 6.4 pps higher than the year’s lowest growth rate, in March. Chinese yuan loans, up 15.4% y/y, have been rising steadily rising as well. The loosening money policy will have a lagged positive effect on the economy for about six months if the current loosening pace can be kept.
Parliament on August 19th approved a cabinet plan to cap total outstanding local government debt at 16 trillion yuan (or $2.5 trillion) this year, up just 3.9% from the 15.4 trillion yuan of 2014. But the most important message to take away from this news is that local government debts are and will be more formalized, and carefully supervised by the central government. The annual growth of local debts is also subject to legal limits. The current local debt owed to the Bank will be swapped for government bonds. Even at 15.4 trillion yuan in 2014, government debt was a modest 24% of GDP. With more formalization and legalization of local debt, local government debt risk to the system will fall significantly.
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