China'S Economy: Rethinking The "Inventory Cycle"

At the beginning of this year, the forecast that China's economy will rebound in the two quarter or the three quarter will have many people. Its basic logic is the inventory cycle, that is, the whole cycle of inventory cancellation and replenishment is about 36 months. By the two quarter of this year or the latest three quarter, the stocktaking process has been completed, and the next is the replenishment cycle.

But in fact, the inventory process is very slow, so far most of the industry's inventory is still high, the Chinese economy seems to be a bit of a meal, so we need to reflect on the thinking logic of the "inventory cycle".

Corporate accounts receivable and bank overdue loans both rise.

As of August 23rd, the total accounts receivable of 1437 listed Chinese listed companies reached 803 billion 900 million yuan, up 45% from the 555 billion yuan a year ago.

The rise of accounts receivable of enterprises shows both the improvement of the overall debt level of enterprises and the deterioration of their operating conditions.

Correspondingly, this year's Bank's bad debt rate has also increased significantly. Because the bad debt rate is a very lagging indicator, it is better to observe the business situation of the enterprises from the rapid growth of overdue loans from banks.

For example, China Merchants Bank reported that the overdue loans at the end of 6 were 18 billion 800 million yuan, an increase of 5 billion 200 million yuan over the end of last year, of which three yuan, three months to one year overdue loans were 10 billion 500 million yuan and 2 billion 700 million yuan, respectively, increasing 62% and 174% over the beginning of the year.

In the fast economic growth stage, increasing leverage can win higher return on investment. Once the economy falls, the average profit of most industries or investment activities will move downward, if the cost of capital is higher.

Investment is not worth the candle, especially for highly leveraged enterprises.

Judging from the classification of industries, the current assets and liabilities ratio of real estate enterprises is about 70%, the liabilities rate of the five major power groups is over 80%, the debt ratio of the Ministry of Railways is over 60%, and the liability ratio of photovoltaic manufacturing enterprises is more than 90%.

From the perspective of regional classification, the leverage ratio of enterprises in the Yangtze River Delta region should be the highest in China, especially in Zhejiang, and the leverage level of enterprises in the eastern region is higher than that in the central and western regions.

According to the standards of OECD, corporate liabilities account for more than 90% of GDP, which is very dangerous. But in 2011, Chinese enterprises accounted for 107% of GDP debt, almost the highest in the world.

What is more worrying is that many enterprises' loans are not used to supplement liquidity or to increase industrial investment, but instead to invest in real estate, minerals or commodities, and even buy leveraged financial products in order to obtain excess investment income.

From last year, the business owners of Wenzhou had frequent debt avoidance incidents, and now the case of Shanghai steel trade enterprises is frequently seen in Chinese gold chains and bank loans are overdue. The Yangtze River Delta region, which has maintained the lowest rate of bad debts for many years, has now become the fastest growing area of bad debts.

At present, the negative factors such as the increase of corporate debt ratio and the expansion of deficit have already been pmitted to banks, which is a causal relationship with the rise of bank bad debt rate and the large scale growth of overdue loans.

With the increase in the number of enterprises and banks involved, the problem of triangular debts that has occurred in history will eventually come into being.

Deleveraging is unlikely to lead to a new round of economic crisis.

Deleveraging is compared with the elimination of inventory. The former is designed to control risk, crisis and survival, while the latter is a contraction in operation, which may not lead to a crisis.

As the economic growth slowed down, the early stage was the result of active regulation on policies. Most scholars judged the economic cycle from the logic of inventory changes. However, with the unsmooth process of inventory, problems appeared in all aspects of China's economy, such as the increase in accounts receivable, the sluggish sales of products, the high level of market interest rates, the extension of loans, the arrears of debts, and so on until the spread of triangular bonds.

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This triangle debt contains two kinds of most typical risks: first, the capital lending chain formed by small and micro enterprises and private high interest loans, which is burdled with overcapacity and falling demand. Because of the "debt" and the "debt" downtime, the two is the money exchange between state-owned large enterprises and the local government financing platform and banks and suppliers. Because of the low return on investment, the potential risk of repayment ability and repayment of principal and interest is caused by the low return on investment. The risk is still gradually accumulating, and the possibility of short-term financial failure is not likely.

The process of cleaning up triangular debts is the process of deleveraging.

Over the past 10 years

In fact, it is also a process of increasing leverage for the government, enterprises and residents. The result shows that the scale of local government debt is rising, the asset liability ratio of enterprises is rising, and some individual investors are adding leverage through bank mortgage loans or private usury.

Comparison

In the process of deleveraging after the subprime crisis, China is also facing the pressure of deleveraging.

But China's current asset bubble is not high enough, so far there has been no significant drop in housing prices. Therefore, the intensity of deleveraging is not great.

Generally speaking, the problem of triangle debts is only partial, mainly in the Yangtze River Delta region, but not serious in the central and western regions.

In addition, the data released by the Ministry of Finance showed that the asset liability ratio of state-owned enterprises in the 1-7 months was 64.6%, an increase of 0.7 percentage points over the same period last year, although it was high, but there was no sign of rapid growth.

Judging from the bank's bad debt rate, although the rise is relatively fast, official figures show that the overall bad debt rate is still within 1%.

Compared with the early 90s and early 2000, both the triangle debt problem and the level of bank bad debt were all very small.

After all, after 20 years of development in China's economy, the standardization of banks and enterprises has been greatly improved. Both the commercial credit system and the degree of marketization have made great progress.

Moreover, the total debt rate of Chinese government departments is around 40%, which is not high compared with other emerging countries.

Moreover, the assets of state owned enterprises and the scale of state-owned land and mineral resources are beyond imagination. If necessary, they can also serve as the financial source of debt repayment. This shows that the government departments have sufficient strength to avoid crises.

Therefore, this round of liquidation and deleveraging is unlikely to spur the economic crisis.

But from another point of view, the possibility of asset bubbles being punctured is reduced because of the adoption of measures to maintain stability in policy regulation, and the possibility of big efforts to introduce policy initiatives is relatively small. This may also mean that the process of deleveraging will be slow.

Economic recovery time or delay

This round of inventory removal process has been close to two years, but the effect is not satisfactory.

According to the data of listed companies, the total inventory of the 1269 listed companies totaled 1 trillion and 920 billion yuan, representing an increase of 7.5% compared with the 1 trillion and 790 billion of the initial inventory, indicating that the total inventory of the listed companies has not risen in the past six months.

According to the industry, the inventory pressure industry is mainly concentrated in coal, steel and other industries. Inventory of automobiles, appliances and real estate industries is also at a historical high level, while liquor and other high-end consumer goods industries have just started to stock up.

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Why is this round going to the inventory process so slow? First of all, this round of adjustment is inevitable after the rapid economic growth over the past 10 years, and the original one should start in 2008. But because of the 4 trillion investment plan to deal with the subprime mortgage crisis, the coming economy will take off again.

Therefore, the elimination of inventory and capacity is actually compressing the supply capacity continuously accumulated over the past 10 years, including internal supply capacity and external supply capability.

For example, China's total export volume has accounted for more than 10% of the total global exports, which is basically an upper limit. If we want to continue to expand exports, we will face the pressure of labor and other factors of production rising.

For example, housing prices have been rising for more than 10 years. Whether they continue to be stable or falling, leveraged investment in real estate needs to be leveraged.

Again, China has more than 100 million cars, and the stage of high sales growth has passed.

These three cases actually indicate that China's external demand and domestic demand have reached a bottleneck stage. If we want to further increase, we must adjust the structure and achieve industrial upgrading.

Secondly, the central government aims at steady growth. Therefore, local governments, enterprises and individuals have the expectation of "once the adjustment is over and the economy will take off again". Therefore, they are not strong enough to go to inventory and capacity, and they even feel lucky.

Third, the central government actually recognizes the crux of the Chinese economy, so it is unlikely that the massive stimulus policy will be launched again. The active fiscal policy and prudent monetary policy adopted at present will hardly make the economy recover.

Because private investment accounts for nearly 2/3 of the total scale of fixed assets, and the level of deleveraging facing the public is also the biggest, so the pressure of private deleveraging is the biggest.

Look at the regulatory space of monetary policy.

Although theoretically speaking, there is much room for reducing interest rates and reducing the accuracy. However, as the interest rate liberalization has increased a lot, the current market interest rate is still at a high level, partly reflecting the upward pressure on the cost of capital caused by deleveraging, so the interest rate cut is of little significance.

Whether or not the reduction is related to the demand for credit, the new loan scale is lower than expected, so the necessity of reduction is limited.

Because of the cardinal number, it is estimated that the GDP in the four quarter will rise to around 8%, but this is not the signal for the bottom up of the economy.

Similarly, for fixed asset investment growth and other indicators, we should also be cautious, although the growth rate in 1-7 months is still above 20%, but this is probably not an effective indicator to observe whether the economy is bottoming up or not.

The index of electricity generation is relatively reliable. The low growth rate of power generation does not match the high growth rate of fixed assets, but it is consistent with the negative growth of enterprise profitability.

Compared with the inventory cycle, the process of deleveraging will not start soon, so the duration will be longer. Moreover, the inventory is mainly enterprise behavior, including the capacity to go, and the wide range of deleveraging involves the whole society's behavior, including the government's deleveraging (the local government compresses investment through debt repayment), the bank's deleveraging (off balance sheet business), the enterprise deleveraging and the resident deleveraging.

Therefore, the fundamental reason for the failure to complete the inventory process is that China's economy has already experienced growth bottlenecks, structural problems are highlighted, and the possibility of economic growth to take the L model is increasing. Relying on traditional means of stimulating the economy is no longer effective. We must solve the contradictions at all levels through deep reform, and change the space in time to win the reform dividend.