China's first quarter economic data came in above expectations and many are raising their growth outlook for the world's second largest economy.
Looking under the surface, however, Leland Miller at China Beige Book told FS Insider that China's positive growth last quarter was due to some of the loosest monetary conditions on record and that complacent investors may be getting a wake-up call in coming weeks and months.
Q1 Good … on the Surface
Though metrics such as Chinese GDP and PMIs gave the impression things are going well, there’s more to the story, Miller noted. It’s not nearly as positive as people have been portraying.
“If you look at the state of the economy, Q1 did so well because the old economy did so well,” he said. “Manufacturing, commodities, and property to some extent, led in the first quarter, where retail did quite poorly and services underperformed.”
It appears that China is hitting its goals, but there’s going to be a big toll to pay later.
Are Credit Markets about to Enter Crisis Mode?
“We're not just seeing another quarter of cheap credit in China,” he said. “We were seeing some of the loosest conditions we’ve ever seen in the history of the China Beige Book survey.”
This is one of the reasons Chinese corporates were able to perform at that level they did.
In the weeks since, now that we’re near the middle of the second quarter, credit on the street appears to be tighter, Miller noted. If that is true, it will put stress on the system.
“This is certainly going to make conditions harder to deal with,” Miller said, with long-term stagnation and a series of mini-crises the most likely outcome going forward.
Commodities at Risk
Raw commodities saw a big turnaround last year and some of the numbers were eye-popping and, yet, many large commodity firms in China were seeing deteriorating cash flows “despite the fact that you’re in the middle of a commodities boom,” he said.
Even with “these epic performances quarter after quarter, firms’ balance sheets are not getting stronger.”
In the months since China Beige Book first started talking about tops in the commodities markets, we’ve seen some very strong movement downward, Miller added.
“I think some of this was juiced earlier this year, and now it’s deflating,” he said.
“The idea that (the Chinese) are going to stabilize at 6.5 GDP growth, or whatever number they’re making up these days, or they’re going to accelerate like some economic analysis I’ve seen has suggested lately, that’s just not going to happen,” he said.
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