China: Signs That A Hard Economic Landing Is Turning Into A Crash

Includes: CNY, FXI, PGJ, SPY
by: The Independent Investor

China is probably the hardest large economy in the world to get a read on. While most major economies and economic regions in the West publish a variety of fairly reliable weekly, monthly, and annual data, China's economic data is difficult to read.

While Chinese equity funds such as the FXI (NYSEARCA:FXI) have underperformed the S&P 500 and its tracking exchange traded fund, SPY (NYSEARCA:SPY), by a fairly wide margin, many in the financial community had grown optimistic about a second half recovery in China.

Companies such as Apple (NASDAQ:AAPL) and GE (NYSE:GE) had fairly strong earnings growth in China this past quarter as well.

While many of the economic reports from China have always been fairly hard for analysts to discern, the recent comments by future premier Li Kiquang to the effect that these figures are unreliable, were alarming.

What was further alarming, was that the future premier pointed to electricity usage, rail cargo, and bank lending, as stronger indicators of the real strength of China's economy, all indicators suggesting China is slowing dramatically. While I have been very skeptical of the Chinese recovery since the world's second largest economy has had a massively overbuilt real estate sector, the recent housing and trade data in China was fairly encouraging.

However, the picture has changed today.

While the April trade data coming out from China showed a surprising trade surplus, the May report was very disappointing.

Today, looking at the key indicators the future premier of China discussed, China's economy appears to be slowing dramatically. Chinese electricity usage increased .7% in April compared to an 11% increase in April of last year. China's exports expanded .3% this month, compared to analyst projections for an 11% year-over-year increase.

China's real estate sector showed new signs of significant weakness as well. New Residential home starts were down around 4% compared to a 5% increase during the first two months of last year, and a 16% increase by this time in 2011. Demand for new bulldozers was down 51%.

So, with China's economy beginning to slow dramatically, what can policy makers do?

I have always maintained that China's surplus on paper is much less than people think because the country lacks sufficient social safety nets such as unemployment insurance, social security, and other programs that are commonplace in the West.

While China's central bank has begun to cut the reserve holding requirements for bank holdings, the country's regional governments and regional banks are burdened by significant debt today. China's real estate sector, which comprises around 13% of the country's GDP, is also massively overbuilt.

China's commodity markets are also seeing new weakness. Reports of defaults for new orders of iron ore, thermal coal, and even soft commodities such as soybeans are coming out. Some Chinese buyers are also asking for shipments of raw materials to be deferred. Earnings reports from companies such as Cliff Natural Resources (NYSE:CLF), Rio Tinto (RTP), and BHP Billiton (NYSE:BHP), have also been very weak.

To conclude, while consumer spending trends remain healthy in China, the country's real estate and construction seems to continue to be weakening. China is obviously not a democracy, and conventional thinking has been that the country's strong central government and huge surplus would enable a soft landing.

However, with nearly a billion people, half of whom live on a dollar a day, and leading indicators suggesting that the world's second biggest economy's growth numbers are anything but real, the country may find it more difficult to stimulate an largely export driven economy with the nation's biggest export markets, the U.S. and the eurozone, still growing very slowly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.