Friday, June 19, 2015

Divergent Provincial Growth.

As China pumped new money into the economy to avoid the effects of the Global Financial Crisis, most of that new money flowed into fixed capital investment (capacity), natural resource excavation, and the property market. The north-eastern region of China led on industrial expansion, Shanxi’s coal market exploded, and Hainan’s real estate market attracted investment from all over the country. Now, those provinces are beginning to feel the adjustment as previous mal-investments are liquidated. According to Bloomberg, China’s slow down is not affecting all provinces equally.
“Plagued by overcapacity and a property slowdown, the industrial northeastern Liaoning province expanded just 1.9 percent from a year earlier, according to a report by 21st Century Business Herald. Nearby Heilongjiang and Jilin are the fourth and fifth slowest growing regions as China's rust belt gets rustier. … Northern Shanxi's dependence on coal weighted its growth to 2.5 percent, the second slowest. … The southern island of Hainan -- China's equivalent of Hawaii -- slowed to 4.7 percent growth in the first quarter from over 8 percent last year. Its pristine air and tropical climate failed to attract more home buyers, with property sales slumping.”
By comparison, Chongqing, Guizhou, and Tibet, three provinces that did not receive as much of the artificial credit that was created over the past few years, are still growing at double digit rates. The monetary stimulus that was meant to delay the re-adjustment is not flowing back into the real economy.
“As college students and pensioners queue for hours to open share-trading accounts, the country's financial capital of Shanghai benefited from the stock market's boom. Financial services contributed 16.6 percent to the city's economy in the first quarter -- higher than the most recent numbers in New York City, Hong Kong and Singapore.”
Unfortunately, as the real economy adjusts, the continued monetary expansion that was implemented to delay the process has only created more mal-investments, but this time in the country’s financial markets. Eventually, the process of artificial credit creation will catch up with itself.