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Daily Intelligence Briefing for June 16

Today’s Issue Cluster: China Economy & Real Estate

After another batch of soggy economic data –  industrial production up a bit, real estate down a lot –  China’s planners are again expanding the “mini stimulus” they launched just a few months ago.

The premier now calls it a “targeted” adjustment to boost growth back to the plan’s 7.5% for the year. The finance ministry has instructed local government to accelerate their spending, leading to a 24% jump in fiscal spending so far this year. More cities are lifting restrictions on real estate purchases. The central bank, a relative stimulus laggard so far, is expanding its recent reserve ratio cut to spur funding for small businesses. New infrastructure projects continue to be rolled out, including a project to turn the Yangtze River into an “economic belt” uniting the eastern and western parts of the country.

Even as the mini-stimulus expands into something more substantial, the list of problems overhanging the economy is getting longer: China has created new credit in the last 5 years equivalent to the entire US banking system; half is shadow finance. Officially, non-performing loans account for 1% of all loans; unofficially, it’s 10% to 20%, excluding shadow loans. And China now has more corporate debt than other any country, including the US, and will account of 1/3 of the global total in 2018. When China’s fiscal imbalances finally slip out of control, the economic damage could easily dwarf the US experience during the recent financial crisis. But inertia is a powerful thing and it can be a long time before the wheels finally pop off.

In a country that has used more cement in last 3 years than the US did in a century, the planners know how to use directives to reach their economic targets and put off the day of reckoning.

ECONOMISTS DOUBT CHINA WILL HIT 7.5% GDP THIS YEAR … BUT THE ECONOMIC NEWS FLOW SUGGESTS IT WILL

 


Source: Bloomberg, McAlinden Research

 

Today’s Issue Cluster: China Economy & Real Estate 

  • Li calls for “targeted” adjustment of the economy to reach 7.5% growth this year
  • Total fiscal spending is up 24% so far this year, led by local governments responding to central directives to accelerate spending
  • The central bank extends the cut in reserve ratios to boost small business financing
  • Li wants to turn the Yangtse into an “economic belt” uniting eastern and western provinces
  • Industrial production holds up but housing starts drop by a fifth, real estate sales are down by a third, and more than a fifth of homes are vacant
  • Bigger cities are starting to lift restrictions on home purchases
  • China has used more cement in the last 3 years than the US did in a century
  • China has created new credit in the last 5 years that is equivalent to the entire US banking system … half is shadow finance
  • Officially, non-performing loans account for 1% of all loans … unofficially, it’s 10% to 20%, excluding shadow loans
  • China now has more corporate debt than any country, including the US, and will account of 1/3 of the global total in 2018
  • China’s State Administration of Foreign Exchange is now the biggest public sector holder of equities in the world

 

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McAlinden Research Partners, a division of Catalpa Capital Advisors, provides daily, weekly, and other periodic reports that identify actionable investment themes early. As students of change, we specialize in the identification of critical inflection points for asset classes, industry groups, and other clusters of securities. MRP reports complement the individual investment styles of clients by guiding them to where they can find investment opportunities. MRP clients include pension funds, sovereign wealth funds, private banks, asset managers and wealth advisors from around the world.

Disclaimer:

The information provided in this presentation (the “Report”) is not to be reproduced or distributed to any other persons. This Report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, sources for public data include Bloomberg, Trading Economics, and FRED (Federal Reserve Bank of St. Louis Economic Data).

McAlinden Research publishes daily, weekly, and other periodic reports on the economy and the markets. Catalpa Capital Advisors, LLC (CCA) is a Registered Investment Advisor which manages client accounts. References to specific securities, asset classes and financial markets discussed herein by McAlinden Research are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Securities discussed in the Report may or may not be held in accounts managed by CCA and/or its associated persons, and changes in those accounts may be made at any time without notice to its subscribers. Neither McAlinden Research nor CCA is under an obligation to inform research recipients if any accounts managed by CCA subsequently purchase or sell securities discussed by McAlinden Research and they do not anticipate providing such information.

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