Taps Coogan – May 4th, 2021

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While the Federal Reserve keeps the peddle to the metal on QE-Infinity and the federal government queues up a new $2+ trillion spending bill every month, China has taken a markedly more constrained approach to economic policy during the Covid pandemic.

In fact, as consumers in the US send round after round of stimulus checks to China via cheap imports, Chinese policy makers are using the economic opportunity created by its historic export boom to try and deleverage the notoriously over-leveraged Chinese corporate sector.

Along those lines, Leland Miller, CEO of China Beige Book International and one of the best informed observers of China’s economy, recently gave an interview with the National Committee on U.S.-China Relations to note that he is seeing that largest contraction in Chinese State-Owned Enterprise (SOE) lending on record.

Mr. Miller:

“I’m not worried about (China’s local debt bubble) popping. Popping signifies sort of an acute crisis where China would have something similar to what the West saw in 2008… That’s not what we’re expecting in China. I think what we are looking at is more of a balloon that’s letting out air over time and the Chinese are going to have a harder and harder time trying to pay of this non-performing debt and that’s going to take away from productive uses of growth and what it’s going to lead to over time is a potentially stagnant economy unless they really get their act together and control this (debt) growth of the next few years…”

“What we are seeing in the first quarter is fascinating… It’s was to early to call this deleveraging. We’re talking about a few months, we’re not talking about three quarters or six quarters, but we’re seeing a real change in the credit situation… When we look at our SOE data…, we’re seeing the lowest levels for state firms borrowing that we’ve ever seen in the history of Beige Book data… Large firms are at the lowest level of borrowing that we’ve seen in five years… You’re seeing credit costs go up across the board… The firms that are typically at the very front of the queue when it comes to accessing capital in China, for the first time in our data, are very dramatically (reducing) their borrowing…”

“After years and years of not seeing deleveraging despite many, many promises that deleveraging was happening, we were never expecting it, so to see this pop out in our data was very interesting for the first quarter.

As we noted a week ago, China’s all important credit impulse appears to be receding, which when combined with Mr. Miller’s observations above raises the question of how China plans to keep its currency pegged to a basket largely dominated by the US Dollar when the two countries’ monetary and fiscal policy appear headed in the exact opposite direction. 

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