Where is the Chinese Growth Machine?

Storm clouds are brewing over China as data continues to highlight an increasing slowdown in the country.

First, the China Banking Regulatory Commission (CBRC) released statistics this week that painted a somewhat worrying picture of the country's banking sector. What worried markets was the rise of non-performing loans (NPLs) on the balance sheets of the country’s largest banks. The ratio increased 4.2% q/o/q and a staggering 11.9% from the previous year. This is a typical scenario that has played out over countless credit-driven asset booms of the past: NPLs continue to climb until they become crippling, forcing banks to stop lending, which in turn freezes the economy.

Further, in a recent report on the country, the New York Times recently explained that managers across China were reporting significant buildups in unsold inventory, especially businesses concentrated in the export sector. Industries including steel trading, ship building, and solar-panel manufacturing have reported a massive surge in bankruptcies as companies across the country are increasingly becoming cash-flow negative. Overinvestment in infrastructure and capacity throughout the economy is causing a massive supply glut, with companies realizing there are simply no customers out there willing to buy their products. Meanwhile, growth in Europe is hemorrhaging and growth in the US is sputtering, meaning that Beijing may have no choice but to pick up the slack in the economy and loosen the money supply.

Analysts have always been wary of official statistics out of Beijing, but when a government entity comes out with a report showing a large increase in NPLs, markets start to wonder what is true. Beijing might have to be particularly aggressive this time, with the possibility of nationalizing bad debt on the banks’ balance sheets being an option.
All of this has been weighing hard on the Aussie dollar lately, as the currency now sits just above its 50-day moving average at 1.0350, having fallen from a high of 1.0618 at the beginning of the month. Should statistics continue to disappoint to the downside, the AUD could be poised for significant losses. This also means that, with an increasingly troubled economy, China is going to be very reluctant to continue strengthening the Chinese yuan, which could further complicate relations between Washington and Beijing, possibly providing renewed ammunition for a trade war.