After riding a nice little wave of investor optimism the past couple months, Chinese markets were down Monday on fears that the economy might not actually be improving. The Wall Street Journal reports:
The Shanghai Composite Index tumbled 2.8% to finish at 2832.11, near its intraday low, while the Shenzhen Composite Index was off 3.6% at 1804.34.
Traders were taking stock of a report Monday in the People’s Daily, which cited an “authoritative” person as saying that China’s economic growth trend would be “L-shaped” rather than “U-shaped” or “V-shaped.” Such citations in the People’s Daily have frequently been associated with views by top officials and therefore carry extra weight among market participants.
“The report suggests to us that future policy easing may be more cautious and that the government may try to hasten the pace of reforms, thus reinforcing our view that the debt-fueled rebound in investment growth will be short-lived,” Nomura analyst Yang Zhao said in a note.
Speaking of debt fuel, China doesn’t seem to have run out of it according to another story in the WSJ:
China is doubling down on efforts to keep unprofitable factories afloat despite for years pledging to curb excess capacity, adding to a glut of basic materials flooding the global economy.
The country’s overproduction of steel, aluminum, diesel and other industrial goods has driven down prices and crippled competitors, leading to thousands of lost jobs in the U.S. and elsewhere.
China’s willingness to artificially stimulate the economy isn’t new, but its efforts have been more aggressive than people realized:
According to a Journal analysis of nearly 3,000 domestic-listed Chinese companies in 2015, reported government aid rose to more than 119 billion yuan, or more than $18 billion, last year compared with about 92 billion yuan in 2014.
Reported subsidies have risen roughly 50% since 2013, based on figures from Shanghai data provider Wind Information Co. Under Chinese accounting standards, such aid can be cash or other perks like subsidized power or land, but doesn’t include some other support, such as capital injections from the government as an equity shareholder.
Commodities markets have been responding to signs of weakness in China’s economy, with stocks falling across the sector. It’s a shot of reality for investors who had gotten rather optimistic lately on some rather flimsy and unreliable data. China’s economy may well pull off an impressive shift from manufacturing to services, but it’s going to take time and patience to unwind all the overcapitalized businesses and infrastructure. And even if the transition goes as smoothly as possible, the end result is still likely to be reduced demand for commodities—movie theaters, doctors and lawyers just don’t use iron ore the way factories do.