China has developed a serious capital outflow problem, which has developed and gotten progressively worse over the past year. It most likely reflects the significant slowdown in the country’s exports growth, reducing the incentives for foreigners to invest in Chinese manufacturing capacity. In addition, the end of the property boom in China, combined with the anti-corruption campaign, may be causing more Chinese to invest abroad. Let’s have a look at the most recent data:
(1) Exports and imports. Merchandise exports have stalled around $2.3 trillion (seasonally adjusted) since early 2013. Imports also stalled starting in early 2013 and turned weaker this year.
(2) PPI, profits and output. The trade surplus (in dollars) has widened to a record high because imports have been weaker than exports. However, both suggest that foreign investors are finding fewer good opportunities in China, especially since there has been a glut of manufacturing capacity, as evidenced by the 42 consecutive months of declines in the PPI. This pervasive deflation suggests that profits are hard to come by in China, which explains why the growth rate in industrial production has plunged to only 6.2% during August from a record high of 20.7% year-over-year during February 2010.
(3) Retail sales and stock prices. Inflation-adjusted retail sales rose 8.8% year-over-year during August. The days of double-digit growth seem to be over. The recent boom and bust in the stock market probably didn’t directly impact very many Chinese, but it can’t be good for consumer confidence.
(4) Social financing. Over the past 12 months through August, China’s bank loans are up 15.7%. A year ago, when the Chinese government was hoping to make the economy less dependent on debt, this growth rate was 13.3%. Over the same period, total social financing, which includes bank loans, rose $2.5 trillion.
China’s economy seems to getting a lot less bang per yuan for all this debt partly because of the worsening of its international capital account.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.