Infrastructure investment in China is nose-diving and bears are roaming the Shanghai Stock Exchange. Does that mean that President Trump’s planned tariffs on another $200 billion of Chinese imports, which could be announced any day, will be enough to nudge the Chinese economy over the brink?
Maybe not. There’s a risk that American trade negotiators, watching the forest, are missing some important—and still rather healthy—trees.
Infrastructure and small-scale private industry are suffering from the shadow banking crackdown championed by President Xi Jinping. But two other important drivers of the economy—state-owned firms and real estate—are doing well. As long as real estate holds up, a sharp slowdown remains unlikely.
Real estate is thriving thanks to a massive Beijing-financed apartment-buying program for “slum dwellers,” which has kept inventories near multiyear lows. That helps prices keep rising, even though sales growth has been trending sideways.
Developers have also proven adept at finding ways around restrictions on shadow banking. One helpful development has been the explosion of asset-backed securities, including so-called supply chain ABS, which has allowed developers to put off paying their contractors for up to a year. Overall shadow credit outstanding fell 3.8% on the year in August, and infrastructure investment growth in the first eight months of the year, excluding power and heat, slowed to a record low of 4.2%. But property developers’ year-to-date funding actually rose 6.9% on the year, according to ANZ, the second straight month of acceleration.
While infrastructure is important to Chinese growth, real estate is far more important. Sky-high land prices and tweaks to China’s statistical methodology make the headline property investment data hard to interpret. But the message from property-related industry is that, for now, things remain healthy. Year-over-year growth in cement and glass output was the fastest in a year or more in August, while electricity output rose 7.3%, the most since May.
This also matters for financial vulnerability. Several private firms have defaulted on bond payments this year, but state-owned company defaults have been rare and so have property-related ones. Problems for private industry matter far less for Chinese bank balance sheets than the health of the heavily leveraged state and real-estate sectors.
Things could get tougher early next year, particularly since policy makers are now dialing back the critical slum redevelopment program. But for now, the message emanating from China is still a relatively mild slowdown. Investors hoping for wholesale capitulation on trade or a 2015-style massive stimulus will likely be disappointed.