13 August 2012

China SignPost™ (洞察中国) #61: “Can Inland Consumption Soften Coastal Industrial Slump? China’s Weak Earthmover Sales and Poor Coal Demand Point to More Economic Turbulence, But Second and Third Tier Property Markets Show Flashes of Life”

Gabe Collins and Andrew Erickson, Can Inland Consumption Soften Coastal Industrial Slump? China’s Weak Earthmover Sales and Poor Coal Demand Point to More Economic Turbulence, But Second and Third Tier Property Markets Show Flashes of Life, China SignPost™ (洞察中国) 61 (14 August 2012).

China SignPost™ 洞察中国–“Clear, high-impact China analysis.”©

With Chinese consumers holding on to their wallets (See China SignPost 60), the People’s Republic of China (PRC)’s near-term economic fate hinges heavily upon its real economy, which still revolves around heavy industrial activity. This means excavating and building, burning coal, making steel, and so forth. The latest earthmover sales data are not quite as deeply negative as they were late in the first quarter of 2012, but they remain weak, with sales of excavators, a bellwether for construction activity, down 20% year-on-year (“YoY”) in June and down by 28% YoY in July. The structural trend looks bad as well, with the 12-month rolling sales figure still declining, albeit less sharply than it was earlier in the year….

Slowing earthmover sales reflect substantial uncertainty among construction companies, who fear spending large sums on machinery that could end up sitting idle if the property and infrastructure markets do not pick up soon. China has been announcing a number of “stimulus” measures since April 2012. However, our sense is that many of the projects included in the announcements were already on the drawing boards when the economy slowed down and are simply being re-packaged as “stimulus measures.” In practical terms, this means they have political significance, but that the main construction commodity markets (earthmovers, steel, concrete, copper) have already effectively priced in the demand the projects are likely to create. Also, not all projects are equal in size or potential impact, and some projects counted for statistical purposes are not very large or significant.

Unlike the massive economic stimulus plan of 2008-09, announced as a RMB 4 trillion (US$586 billion) investment, subsequent stimulus measures are likely to be limited. Investors should avoid being swayed by what may become a fool’s rally in which major traders ride the small bursts of stimulus while they can, only to dump holdings once it becomes clear that the ride is over. Small investors and poorly-managed funds that don’t move quickly enough may face a hard landing indeed. There will be a big commodities piece to this story, as China’s real economy is fueling a substantial part of the global and regional commodities boom, and its softening will affect prices across the board.

China’s overall economic downturn will serve as an acid test of whether or not the Central and Western provinces can return to robust growth and meaningfully compensate for the slowdown on the East Coast. Four of China’s 10 largest provincial economies in 2011 were in interior provinces (Henan, Hunan, Sichuan, and Hubei), accounting for 28% of the combined GDP of the 10 largest provincial economies.

The presently weak thermal coal demand and drop off in steel production evidenced by reduced coking coal demand bode poorly for these interior provinces’ ability to underpin growth in the near-term and we think it realistic to expect continued economic stagnation at least through the October 2012 political transition period. No major policy changes are likely until after the 2,270 delegates of the 18th National Congress of the Communist Party of China meet to transfer power to a fifth generation of PRC leadership.