As another month rolls by, yet more crises threaten to destabilize China’s growth. The latest come in the form of a perilously bloated real estate market, murky shadow banks and a swollen debt-to-GDP ratio. All the while exports and manufacturing data are showing only faint signs of improvement.
House prices have boomed on cheap credit, but this credit is now drying up and house prices are falling as a result. Non-performing loan ratios are soaring and could potentially point to a dangerous bubble that could stall consumer spending.
The overall debt-to-GDP ratio has now soared to 250%, compared to 150% just six years ago, and central financiers have already put fresh funding into another mini-stimulus earlier this year. Although still some way off the US peak of 330%, the spike is still worrying.
Investment, a key driver of China’s GDP growth, is slowing and shadow banks keep shifting bad debt from one vehicle to another. Investment in fixed assets has since slowed to 17% from more than 20% this time last year. Will this combination of debt, both public and private, and an inflated real estate sector precipitate a financial crash in the near future? The answer is probably not.
Despite Europe and Japan still floundering and the US growing, but not absorbing Chinese exports in the same way as 2008/9, trade data is actually showing a modest rise. Exports were up by 15.3% in September, compared to forecasts of around 9%, while imports also rose in terms of value by 7%.
However, analysts question whether the gains can be attributed to a surge in production as manufacturers rush to take advantage of cheap oil prices (WTI has been hovering around the $80 mark for some time now). Nonetheless, China’s PMI edged up in October to 51.2 from 51.1 a month earlier.
If the surge in exports is artificial and investment continues to slow, we may see a faster-than-expected contraction of China’s economy. In the automotive sector, car sales growth is expected to be less than half of 2013 levels at just 7%, according to China Association of Automotive Manufacturers’ chairman Doug Yang. The number of earth excavating machines sold in China also fell 28% year-on-year in August.
Cracking down on pollution, the government is introducing new vehicle regulations which could restrict non-compliant manufacturers from building more vehicles or adding new models. Since a 2013 survey of 85 manufacturers showed that 30% fell below required standards, OEMs and lubes producers alike should take note.
Companies operating in this sector would do well to be prepared for a sharp contraction, as the net effect of an overall slowdown would be increased competition amongst providers of all sizes. Indeed, Great Wall Lubricants general manager Song Yunchang has put his organisation through a rigorous “quality month”: a comprehensive audit of its personnel and operations to enhance its offering.
Song predicts China is moving into a period of “Jungle law”, characterized by fierce and prolific competition and increasingly stringent regulations. The near kaizen approach, focused on advanced technology, improved quality and internationalization could be a sign that Great Wall is squaring up to its international rivals.
As always, local knowledge will be key. But this will not be reserved for domestic companies alone, as VW has proved many times through its targeted social media campaigns. This is precisely why OATS has introduced earlFUSiON, which is able to register Chinese characters and give both foreign and domestic lubes marketers a winning edge as competitive intensity increases.
As always you can find out more, or comment on anything you read in this Bulletin, simply contacting Diana Shen. We look forward to hearing from you.
Sebastian Crawshaw
Chairman
THE EBOLA CRISIS
The deadly Ebola virus that has ravaged many less fortunate regions around the world. There are many Ebola appeals being established, all of which are crucial to saving lives and protecting economic growth both in Africa and globally. OATS is one of thousands of organisations donating financial support and we are calling on the rest of the lubricants industry to do so as well. Please give generously, either personally or as an organisation, to the most suitable appeal in your jurisdiction or you can click here for the UK government appeal which is matching donations on a pound for pound basis.