China’s Economy is Unraveling to Pieces, in Dollar Terms

I love studies like this. We all know X is X. But when X is viewed in the prism of W, it is then Y.

Y sucks and is getting worse.

Get it?

Free cash flow for the dog eating nation of China is cascading lower, at a time and place when the debt burden is skyrocketing.

This lads, and pardon my lack of civility on the subject, is when the farmers who moved into the city to work at a suicidal Foxconn den of inequity start to realize they’ve made a mistake and China’s urbanization plans turn to shit.

While in yuan terms the slowdown is more gradual, the decline in nominal GDP gains is still dramatic — to a 6.4 percent pace at the end of 2015 compared with 10.1 percent back in 2013 and in excess of 18 percent in 2010 and 2011. The slide highlights the need to follow through on slashing excess industrial capacity, eliminating unprofitable enterprises and revving up new drivers of expansion.

“The biggest problem with plunging nominal GDP growth is that the cash-flow growth to the corporate sector has declined at a time when growth in its debt servicing has accelerated,” said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. “Because debt is so much larger than the economy, debt servicing each year will still be two to three times the incremental growth of nominal GDP.”

China’s debt-to-GDP ratio surged to 247 percent last year from 166 percent in 2007, propelled by a lending binge in the aftermath of the global financial crisis. Days before the National People’s Congress, the central bank this week lowered the ratio of deposits major banks must hold in reserve, letting them deploy more in lending.