Debt has diminishing marginal returns. The US and Europe have reached the point where the returns from debt are negative, after debt service costs, and it appears that China may have reached it too. From Gordon Johnson at Axiom Capital via zerohedge.com:
We believe that exhibit 1 says a lot: it shows that despite a record level of new credit issued by China’s PBoC YTD through Oct. 2017 (which stands in stark contrast to government authorities continued statements that China is de-levering), China’s economic backdrop is currently experiencing:
- (a) monthly construction new start (commercial + residential + office) growth slowing Y/Y (Ex. 2),
- (b) monthly fixed asset investment growth slowing Y/Y (Ex. 9),
- (c) monthly cement output slowing Y/Y (Ex. 5),
- (d) monthly electricity production slowing Y/Y (Ex. 6),
- (e) monthly M2 money supply growth slowing Y/Y (Ex. 7),
- (f) monthly household loan growth slowing Y/Y (Ex. 8),
- (g) monthly private fixed asset investment growth slowing Y/Y (Ex. 10), and
- (h) monthly home price growth slowing Y/Y (Ex. 12) – in fact, select data points have turned negative Y/Y.
Stated differently, while the lion’s share of our client base continues to tell us, with respect to our bearish views on China… “President Xi Jinping will simply stimulate more if/when things get bad”, we would highlight, again as detailed in Ex. 1 below, China stimulated at a record pace in 2017, yet it did not resonate in improved economic activity (in fact, the exact opposite appears to be unfolding – i.e., economic growth is slowing across a number of data points).
Furthermore, underpinning our view that China’s debt stimulus was targeted specifically at the months preceding the 19th Party Congress in Oct. 2017 (i.e., when President Xi Jinping consolidated power to become the strongest Chinese leader since Mao Zedong), implying we may see a phase of debt fatigue, we note that in the first 10 months of 2016, incremental credit issued in China on a month-over-month (“M/M”) basis was negative three times (i.e., May, July, and Oct.), and averaged $189 billion on a monthly basis; yet, in the first 10 months of 2017, incremental credit issued on a M/M basis was positive in each month outside of Oct., and averaged $429 billion on a monthly basis (in Oct. 2017, the month the 19th Party Congress concluded, new credit issued fell by $11.9 billion M/M).