The internals of China’s flash PMI, released yesterday, showed all segments except “Stocks of Finished Goods” contracting, with most at an accelerating rate:
As noted by FT Alphaville yesterday, even the one expanding segment – the stocks of finished goods – is a bearish indicator for the Chinese economy, given that new orders are contracting and finished goods are piling up for all sorts of manufacturers.
On the topic of finished goods piling up, the New York Times has an article out today on the massive build-up of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses:
The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
“Across the manufacturing industries we look at, people were expecting more sales over the summer and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt”…
Interviews with business owners and managers across a wide range of Chinese industries presented a picture of mounting stockpiles of unsold goods…
And the supply glut will likely continue to get worse, at least in the auto industry, as China continues to build manufacturing capacity, despite falling profitability:
Inventories of unsold cars are soaring at dealerships across the nation. Quality problems are emerging. And buyers are becoming disenchanted as car salesmen increasingly resort to hard-sell tactics to clear clogged dealership lots.
The Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of full capacity — far below the 80 percent usually needed for profitability.
Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States…
Manufacturers have largely refused to cut production, and are putting heavy pressure on dealers to accept delivery of cars under their franchise agreements even though many dealers are struggling to find places to park them or ways to finance their swelling inventories…
Meanwhile, it looks like the Chinese Government is doing its best to paper over the cracks:
Officially, though, most of the inventory problems are a nonissue for the government.
The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new methodology showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008, according to a report last Friday.
Yet businesspeople in a wide range of other industries have little doubt that the Chinese economy is in trouble.
“Inventory used to flow in and out,” said Mr. Wu, the faucet and sink sales manager. “Now, it just sits there, and there’s more of it.”
China bulls will point to the fact that these stories are anecdotal only, and don’t necessarily translate across the Chinese economy. But consider the below chart from the IMF showing the Chinese economy suffering from serious and increasing over capacity, with an average capacity utilisation rate of only 60% – the lowest level in decades:
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
