Rising inventory is one of the best early signs of a slowdown as it shows up after demand has dropped but before supply has realized or adjusted. In the NYTimes, there is evidence of a mass buildup in inventory, in spite of attempts by the Chinese government to hide it.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
Chinese export growth, a mainstay of the economy for the last three decades, has slowed to a crawl. Imports have also practically stopped growing, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid sharply, although there have been hints that they might have bottomed out in July, and money has been leaving the country through a variety of legal and illegal channels.
Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.
Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.
Another sign is to look at the raw material side and in particular: steel/iron ore. Much of China's growth has come from manufacturing and infrastructure. Steel production is a key raw material to go into those industries. So looking at ore demand to the factories is also useful. Unfortunately, the signs from Australia (the main supplier of iron ore to China) doesn't look pretty. China has enormous steel production capacity but yet iron ore has dropped to $106 per tonne, below the $120 per tonne normally considered profitable for miners. The falling prices indicate there is virtually no demand from China's steel mills and thus no demand from manufacturing and industry indicating pretty anemic growth.
All these point to significant slowdown, well below what one would think from official growth rates of ~7%. Is the government hiding the real figures? Very likely...
Officially, though, most of the inventory problems are a nonissue for the government.
The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new method showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008.
In any case, the Chinese stock market has been reaching new lows, likely in anticipation of the slowdown, there still remains significant headwind risk for many countries that rely on China for various trading relationships. Australia and Brazil both rely on China for a large part of their raw material sales and most of Southeast Asia as well as Japan also suffer significant domestic demand risk. Heads up, if China slows down dramatically, there really is nobody left to pick up the slack between the US growth stagnation and Europe's economic crisis.