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China economy worsens in July

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BEIJING — China reported a raft of unexpectedly weak July data on Wednesday, including a slump in industrial output to more than 17-year lows, pointing to further slowing in the economy as the U.S. trade war takes a heavier toll on businesses and consumers.

Activity in China has continued to cool despite a flurry of growth measures over the past year, raising questions over whether more forceful stimulus may be needed, even at the risk of racking up more debt.

After a flicker of improvement in June, analysts said the latest data was evidence that demand faltered across the board last month, from industrial output and investment to retail sales.

That followed weaker-than-expected bank lending and gloomy factory surveys, reinforcing expectations that more policy support is needed soon.

China’s economy needs more stimulus because the headwinds are pretty strong and today’s data is much weaker than consensus,” said Larry Hu, head of Greater China economics at Macquarie Group in Hong Kong.

The economy is going to continue to slow down. At a certain point, policymakers will have to step up stimulus to support infrastructure and property. I think it could happen by the end of this year.”

Industrial output growth slowed markedly to 4.8% in July from a year earlier, data from the National Bureau of Statistics showed, lower than the most bearish forecast in a Reuters poll and the weakest pace since February 2002.

Analysts had forecast it would slow to 5.8%, from June’s 6.3%. Washington had sharply raised some tariffs in May.

Infrastructure investment, which Beijing has been counting on to stabilize the economy, also dropped back, as did property investment, which has been a rare bright spot despite worries of potential housing bubbles.

Crude steel output fell for a second straight month in July, while production of motor vehicles continued to fall by double digits.

The industry ministry said last month that the country would need “arduous efforts” to achieve the 2019 industrial growth target of 5.5% to 6.0%, citing trade protectionism.

INVESTMENT, RETAIL SALES GROWTH COOLS

China’s economic growth cooled to a near 30-year low of 6.2% in the second quarter, and business confidence has remained shaky, weighing on investment.

While officials have cautioned it would take time for higher infrastructure spending to kick in, construction growth has been more muted than expected.

Fixed-asset investment rose 5.7% in January-July from the same period last year, lagging expectations of a 5.8% gain, the same as January-June.

But readings by sector showed a more marked loss of momentum in critical areas at the start of the third quarter.

Infrastructure investment – a powerful growth driver – rose 3.8% in the first seven months from a year earlier, slowing from 4.1% in the first half despite massive local government bond issuance, mainly to fund road and rail projects and other civic works.

Data from Japanese construction equipment maker Komatsu Ltd. showed activity remained weak in China in July, with operating hours for its machines falling for a fourth straight month.

In a sign the housing market’s resilience may be waning as Beijing cracks down on speculation, property investment slowed to its weakest this year. It rose 8.5% on-year in July, from June’s 10.1%. Though home sales inched back to growth, new construction starts cooled.

Retail sales are also pointing to growing consumer caution, most evident in falling auto sales but also in property-related spending on items such as home appliances and furniture.

Retail sales rose 7.6% in July, well off consensus of 8.6% and weaker than the most pessimistic forecast. Sales had jumped 9.8% in June, which many analysts had predicted would be temporary.

Job security worries may also be a factor. Nationwide survey-based unemployment edged up to 5.3% from 5.1% in June, though many market watchers believe it could be much higher.

“We maintain our view that (economic) growth has yet to bottom out and expect Beijing to maintain its easing policy stance,” economists at Nomura said in a note.

Nomura expects growth will slow to 6.0% in the third and fourth quarters — the bottom end of the government’s target range.

Authorities have already announced hundreds of billions of dollars in infrastructure spending and corporate tax cuts over the last year, and repeatedly cut bank’s reserve requirements (RRR) to free up more funds for lending and reduce borrowing costs.

But credit demand has been tepid, with companies in no mood to make investments given the cloudy business outlook and banks wary of rising bad loans.

Sources told Reuters recently that more aggressive action such as interest rate cuts are a last resort, as it could fuel a rapid build-up in debt and financial risks.

ESCALATING TRADE WAR

Recent months have been marked by a sudden escalation in the U.S.-China trade war that has raised pressure on both economies and sparked fears of a global recession.

A brief ceasefire was shattered earlier this month after U.S President Donald Trump vowed to impose a 10% tariff on $300 billion of Chinese imports from Sept. 1.

China let its yuan currency slide to an 11-year low days later, prompting the U.S. Treasury Department to label Beijing a currency manipulator and triggering heavy selling in financial markets.

Some much-needed relief came on Tuesday, however, after Trump said he would delay duties on some Chinese imports including cellphones and other consumer goods, in an apparent effort to blunt tariffs’ impact on U.S. holiday sales.

Still, new tariffs will go into effect next month on about half of Washington’s $300 billion target list of Chinese goods, and analysts say the chance of any long-term trade deal after the recent escalations has sharply diminished.

(Reporting by Huizhong Wu, Yawen Chen and Stella Qiu; Editing by Kim Coghill)

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Economy

Canada banks are holding back the truth about the economy

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Canada banks: Would you lend money to an outfit called Wrnch Inc.? Probably not if your business model has for centuries been based on prioritizing companies with names such as McCain Foods Ltd., Hudson’s Bay Co., Canadian Pacific Railway Ltd. and Teck Resources Ltd.

Big-name enterprises like these form the foundation on which the modern financial industry is built. They have little difficulty getting loans because they have lots of hard assets — factories, inventories, real estate, equipment — to put up as collateral.

From a macroeconomic perspective, there is nothing wrong with such an approach to lending, provided the economy revolves around those same tangible goods.

But economies that are overly reliant on risk-averse banks to finance growth and productivity gains start to fall behind when intangibles — ideas, talent, data — become the drivers of wealth.

Wrnch’s evolution shows why. The four-year-old software company, which uses artificial intelligence (AI) to do things with video that few others can, could pile up an impressive stack of computer gear that should be worth something to someone. It also has a full-length “mirror” in the lobby that wraps onlookers in suits of digital body armour. The espresso machine looks expensive, but it’s no locomotive.

Bottom line: there isn’t a lot of stuff for a bank to sell at a bankruptcy auction if a loan goes bad. Does that make Wrnch worthless? Hardly. Its intrinsic value has nothing to do with the amount of stuff it could drop on a banker’s foot.

For one thing, Paul Kruszewski, Wrnch’s founder and chief executive, has already created and sold two AI companies since 2000, so he has a track record of success. That’s rare in AI, which has existed as theory for a few decades, but only emerged as a standalone industry during the past few years.

Furthermore, Kruszewski’s newest venture, which uses powerful algorithms to process and analyze video of human motion, is profitable and growing, with the number of employees doubling in size last year to about 30. And Wrnch is already playing in the Big Leagues: it has a contract with Intel Corp. to help the second-biggest maker of silicon chips track and analyze athletes’ performances with three-dimensional imagery at the 2020 Olympics in Tokyo.

Wrnch is going somewhere. Kruszewski wants to hire an additional 200 people within the next few years and join the vanguard of Canadian companies at the forefront of AI, which could add about US$16 trillion to global gross domestic product by 2030, according to PricewaterhouseCoopers.

There is, of course, a but.

“We’ve hit the limits of organic growth,” Kruszewski said in an interview in January. “We do need some investment now.”

There are dozens, maybe even hundreds, of companies such as Wrnch in Canada that have legitimate potential to be a McCain Foods or a CP Rail in the innovation economy. Most, if not all, are being restrained to some extent by the financial system’s deep aversion to risk.

Philippe Daoust called up ex-pat entrepreneurs when he was asked in 2017 to lead National Bank’s technology team to find out why they had left. One startup said none of the banks would give it a bridge loan for a measly six weeks. The company found a lender in the United States that demanded only one condition: U.S. residency.

“Things are getting better, but we’re not there,” National’s vice-president of venture capital said. “The alarm has rung, but we are reacting as Canadians react, slowly.”

Daoust leads a team of about a dozen bankers that have a green light to be flexible on what counts as collateral. National is currently working with about 30 companies and has invested some $30 million over the past few years.

“We have been a risk-averse country,” he said. “But there is risk in not helping and watching those companies go away.”

Not so long ago, Canada was a funding desert for startups. It’s not that bad now, in part because Ottawa has been using the Treasury to leverage private investment.

Homegrown venture capitalists participated in 610 deals worth about $3.7 billion last year, little changed from 2017, but a 76-per-cent increase from 2014, when firms completed 438 deals worth about $2.1 billion, according to the Canadian Venture Capital Private Equity Association.

Still, in a world where one firm, SoftBank Group Corp., the Japanese internet and telecommunications giant, runs a single venture-capital fund worth US$100 billion, it’s fair to say that Canada — the world’s 10th largest economy — could be doing better.

The biggest Canadian provider of venture funding is BDC Capital, an arm of the Business Development Bank of Canada, the Montreal-based Crown lender that has a mandate to back smaller companies.

The money available for starting and scaling is being fronted by a relatively small number of investors, which means entrepreneurs can find themselves in take-it-or-leave-it situations because there is too little competition. And because Canada’s venture-capital firms tend to be young, they don’t always have the expertise that ambitious startups desire to help take their companies to another level.

“There is plenty of capital available,” Ari Himmel, founder and chief executive officer of Faimdata, a Montreal-based startup that uses AI to study customer behaviour for retailers, said. “The question is, do they understand what we are trying to do?”

Canada’s banking system is part of the problem. Policy decisions taken over decades created a Toronto-based oligopoly of five institutions that controls 85 per cent of all banking assets.

That level of concentration has brought financial stability and excellent returns for shareholders. But the downside of limiting competition is accepting to forgo the economic growth and productivity gains that Canada might enjoy if its banks were forced to be more entrepreneurial.

The unforeseen consequence is that the country’s most powerful sources of finance are often viewed as being incapable of leading the transition to a new economy. Instead of enabling a battalion of entrepreneurs, the biggest banks are focused on mortgages and wealth management.

“Until you are a $1-million company, there is very little bank financing available,” said Raymond Luk, founder and chief executive of Hockeystick.co Inc., a digital platform that gathers and analyzes data on private companies and investors. “Banks won’t take my entrepreneurial track record as collateral.”

To be sure, Bay Street appears to have realized that it might have been missing out on something big and the wake-up call might have been the sight of smaller peers encroaching on the Big Five’s turf.

For example, California’s Silicon Valley Bank, which specializes in lending to technology companies, received a licence to operate in Canada on March 4. Michele Romanow, one of the stars of Dragon’s Den, in 2016 launched San Francisco-based Clearbanc, which focuses on lending to entrepreneurs.

In addition to National, all Big Five lenders are now dabbling in technology, but not all of them are keen to talk about what they are doing. Royal Bank of Canada and Toronto-Dominion Bank turned down interview requests, while Bank of Nova Scotia sent a statement that said it has partnered with a few venture-capital funds and that it is a founding partner of NextAI and Creative Destruction Lab, two prominent tech incubators.

Over at Bank of Montreal, Devon Dayton leads a team of a half a dozen bankers exclusively on tech focused as managing director of Technology & Innovation Banking. Like at National, the group works with an expanded list of lending benchmarks that includes recurring revenue and contracts.

“We agree with you,” Dayton said when asked whether traditional banking was too rigid for the new economy. “There is a significant opportunity here.”

The leader among the Big Five appears to be Canadian Imperial Bank of Commerce, although it chose to buy its way into the game rather than earn a place at the table. Last year, CIBC bought Wellington Financial, a boutique tech lender based in Toronto, and created CIBC Innovation Banking.

“Part of my job is to build the next generation of lenders,” said Mark McQueen, Wellington’s former chief executive and now president and executive managing director of the new CIBC unit. “Canada didn’t have a domestic champion in the lending space. No one would lend (cash) burn.”

About 30 people work for McQueen at offices in Toronto, Montreal, Vancouver, Menlo Park, Calif., Denver and Reston, a Virginian suburb of Washington, D.C. He said the bank is ready to back smaller companies that need only $1 million and points to emerging stars such as Lightspeed POS Inc., which enlisted CIBC, along with others, to support its $240-million initial public offering earlier this month.

“It’s a wonderful opportunity,” he said. “It’s exciting to see the other institutions playing catch-up.”

Catch-up is needed. The banks are an afterthought for many of Canada’s best entrepreneurs, who have learned how to get on without them.

Wrnch aspires to be a “Canadian champion,” but it’s unlikely that much of the millions of dollars the company is in the process of rounding up will actually come from Canada.

Kruszewski is focused on Silicon Valley, which is dense with venture-capital firms that are loaded with cash and unafraid to spend it. “These are the guys most interested in building a large business.”

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Venezuela Economic Situation Could Through 2025

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Venezuela is heading down precisely the same path as the now-defunct Soviet Union did a quarter-century ago. Put bluntly; the country is likely going further into a deep economic hole where it could remain until the middle of the next decade.

A recent report shows how the country, which is home to the world’s largest proven oil reserves, has become yet another victim of socialist economics that fails time-after-time throughout history.

Its economy is currently is wracked by hyperinflation and the economy is in a tailspin.

The annualized rate of inflation hit a staggering 121,102% on March 23, down from the nosebleeding recent high of 165,382% on February 26, according to estimates from Steve Hanke, professor of applied economics at Johns Hopkins University and an expert in hyperinflation.

The economy shrank more than 16% in each of 2016 and 2017 respectively, according to data collated by statistics website Tradingeconomics. GDP has likely receded even further since then as oil production, on which the country relies for export revenue, has approximately halved to 1.4 million barrels a day recently down from almost 3 million five years ago in early 2014, according to data from Trading Economics.

As if that wasn’t bad enough, the malaise could continue for years to come, according to a recent report from the Washington-D.C.-based think tank The Institute of International Finance (IIF.) The report states a harsh truth:

Venezuela is in a deep depression that is unlike the typical V-shaped recession in EM. The cumulative GDP decline since 2013 is comparable to the experience of FSU [former Soviet Union] states in the early 1990s, raising the risk of a slow recovery in a scenario where policy reform takes place

The report continues: “It took the median FSU state 12 years to achieve pre-crisis real GDP levels and significantly more in some cases.”

Put another way, unlike the usually fast economy recoveries from recessions in the U.S., the former Soviet Union had to wait a dozen years to get back to where it started.

If Venezuela follows the same economic path as the former communist countries of eastern Europe, then it could take until 2025 to recover to where it was in 2013. That was the year before Venezuela’s economy began to collapse.

To be clear, Venezuela faces a double problem of hyperinflation and economic collapse, whereas Russia and most of its former satellite states faced only the latter — the economic decline.

IIF says fixing the hyperinflation will likely be the easier of the two matters. Stabilizing the currency could be fixed by pegging the Venezuelan Bolivar to the U.S. dollar. Similar such strategies have helped other countries end periods of hyperinflation with relative speed. “Although hyperinflation has set in, historical experience suggests it could end relatively fast under stabilization policies,” the IIF report says.

However, the more significant matter facing Venezuela is in managing the broader economic recovery. “If policy direction changes, engineering a strong activity recovery might be more complicated than ending hyperinflation.”

In other words, even if the country shakes off its socialist policies, the battle to bring back Venezuela’s economy will likely have just begun.

That’s because what will be needed will be wholesale reform from a centrally planned economy to one that is driven by market pricing.

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Trump says US Economy is Strong

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BERKELEY HEIGHTS, N.J. – President Donald Trump dismissed concerns of recession on Sunday and offered an optimistic outlook for the economy after last week’s steep drop in the financial markets.

“I don’t think we’re having a recession,” Trump told reporters as he returned to Washington from his New Jersey golf club. “We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they’re loaded up with money.”

A strong economy is key to Trump’s re-election prospects. Consumer confidence has dropped 6.4% since July. The president has spent most of the week at his golf club in New Jersey with much of his tweeting focused on talking up the economy.

Aides sought to reinforce that message during a series of appearances on the Sunday talk shows.

Larry Kudlow, Trump’s top economic adviser, dismissed fears of a looming recession and predicted the economy will perform well in the second half of 2019. He said that consumers are seeing higher wages and are able to spend and save more.

“We’re doing pretty darn well in my judgment. Let’s not be afraid of optimism,” Kudlow said.

Kudlow acknowledged a slowing energy sector, but said low interest rates will help housing, construction and auto sales.

Kudlow also defended the president’s use of tariffs on goods coming from China. Before he joined the administration, Kudlow was known for opposing tariffs and promoting free trade during his career as an economic analyst. Kudlow said Trump has taught him and others that the “China story has to be changed and reformed.”

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“We cannot let China pursue these unfair and unreciprocal trading practices,” Kudlow said.

Democratic presidential candidate Beto O’Rourke said the U.S. needed to work with allies to hold China accountable on trade. He said he fears Trump is driving the global economy into a recession.

economy is strong

“This current trade war that the president has entered our country into is not working,” O’Rourke said. “It is hammering the hell out of farmers across this country.”

Last month, the Federal Reserve reduced its benchmark rate — which affects many loans for households and businesses — by a quarter-point to a range of 2% to 2.25%. It’s the first rate cut since December 2008 during the depths of the Great Recession. Federal Reserve Chairman Jerome Powell stressed that the Fed was worried about the consequences of Trump’s trade war and sluggish economies overseas.

“Weak global growth and trade tensions are having an effect on the U.S. economy,” he said.

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Breaking with historical norms, Trump has been highly critical of Powell as he places blame for any economic weakness on the nation’s central bank for raising interest rates too much over the past two years.

“I think I could be helped out by the Fed, but the Fed doesn’t like helping me too much,” Trump complained Sunday.

Peter Navarro, who advises Trump on trade policy, shared that sentiment.

“The Federal Reserve chairman should look in the mirror and say, ‘I raised rates too far, too fast, and I cost this economy a full percentage point of growth,’” Navarro said.

Trump acknowledged at least a potential impact on consumers when he paused a planned 10 per cent tariff hike for many items coming from China, such as cellphones, laptops, video game consoles, some toys, computer monitors, shoes and clothing.

“We’re doing (it) just for Christmas season, just in case some of the tariffs could have an impact,” the president told reporters in New Jersey.

Navarro would not go even that far, saying Sunday “there’s no evidence whatsoever that Americans consumers are bearing any of this.”

Kudlow was interviewed on NBC’s “Meet the Press” and “Fox News Sunday.” O’Rourke spoke on NBC, and Navarro appeared on CNN’s “State of the Union” and CBS’ “Face the Nation.”

Trump’s trade war with China has been a target of criticism by Democrats vying to challenge him in 2020.

“There is clearly no strategy for dealing with the trade war in a way that will actually lead to results for American farmers or American consumers,” said Mayor Pete Buttigieg of South Bend, Indiana, a Democratic presidential candidate. He said on CNN that it was “a fool’s errand” to think tariff increases will compel China to change its economic approach.

Trump maintained that China’s economy is struggling because of the tariffs and would like to make a trade deal with the U.S. He said he could make a “bad deal” and the stock markets would go up, “but it wouldn’t be the right thing to do.”

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