A seriously behind the curve Goldman Sachs is still trying to defend its capital-devouring long commodity call. Having completely missed the severity of the China slowdown, and associated commodity crash, it now says a rebound is imminent:
We have to add to the mix a combination of weather related disruptions, rising regulatory risk andthe material downside in the July data–which was evident across almost all sub-categories inboth consumption and industrial production data…so the question is what to make of thetrajectory, Delta aside?? WHILST ECONOMIC ACTIVITY IN CHINA WILL REMAIN SOFT IN AUGUST…ourEconteam see a policy support ramp up into Q4. They have trimmed their Q3 real GDP forecastslightlyfurther, to 5.1% yoy / 1.3% qoq ann (vs. 5.4% / 2.3% previously) but expect a rebound insequential growth on economic reopening and government support in September andQ4. Bottom line, they expect a nice cocktail of monetary and fiscal stimulus to save theday…they look for fiscal spending to pick up significantly and for policymakers to implementvarious sector-level regulations in a coordinated manner…amplified by liquidity provision fromanother RRR cut. Such monetary and fiscal policy coordination canhelp provide a floor togrowth. Indeed, there are signs that the market is starting to reprice China growth prospectshigher recently (e.g. the oil rally)…but underlying pessimism remains and a policy response ofthe order that our team expects is not intoday’s price.
There are 1175 words left in this subscriber-only article.
Start your free 14-day trial today!
Wrong again. Even if lending suddenly surges now, there’ll be no rebound before late Q1, 2022. What do they think, that infrastructure projects roll off a conveyor belt?
More to the point, infrastructure lending is still underperforming despite efforts to revive it. There is plenty of scope left in local government quotas, and it is right to expect more borrowing ahead, but it will likely continue to disappoint so long as the property development market sags given the revenue relationship between the two. And it is not big enough to offset property anyway.
At best, the Chinese hard landing in the construction sector continues apace. To wit YuanTalks:
China’s heavy truck and excavator sales plunged in August on year after robust growth in the first half of the year. Analysts believe the worst for the market is about to end and as issuance of local government special-purpose bonds picks up in the coming months, sale figures could rebound soon.
China’s heavy truck sales slid 19 per cent in August from the previous month to about 62,000 units, plunging 52 per cent from the same period last year, according to data from cvworld.com, a Chinese commercial vehicle information provider.
Separate data from machinery industry consultancy CME showed that Chinese machinery companies sold a total of 17,200 units of excavators in August, sliding about 21 per cent from a year earlier. That included 11,700 units sold domestically, tumbling about 38 per cent from the same period last year, and 5,500 units sold overseas, surging about 92 per cent year over year, showed the data.
That’s in contrast to robust growth in the first half of the year, when China’s major machinery makers sold a total of 223,833 units of excavators, rising 31.3 per cent from a year earlier, according to China Construction Machinery Association. That included 193,700 units sold domestically, up 24.3 per cent year over year, and 30,133 exported, jumping 107 per cent from a year ago.
China Evergrande Group’s property sales fell in August as the real estate market slowed, dealing a fresh blow to the cash-strapped developer.
Contracted sales, including amounts offset through the sale of property units to suppliers and contractors, dropped to 38.08 billion yuan ($5.9 billion), a filing showed late Friday. That’s 26% lower than contracted sales of about 51.48 billion yuan a year ago.
In some measure, local government infrastructure and property starts are the same trade. This is the problem with an inverted balance sheet. Everything is always going up together or always going down together.
This is why I still think that, eventually, Chinese authorities will panic. But not until after the hard landing in construction and (possibly) wider.
Commodities be damned.