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China's censors were busy with the corrector fluid over the weekend. Finance minister Lou Jiwei's comments last week at a news conference that China was aiming for 7 per cent growth this year, were quickly edited to read 7.5 per cent – bang in line with the current official target. But that China's gross domestic product growth slowed to 7.5 per cent in the second quarter, from 7.7 per cent in the first, and looks set to slow further, suggests that Mr. Lou's words were indeed a Freudian slip. Beijing now has a job on its hands to ensure that this slowdown does not turn to a rout.
The Beijing-led liquidity squeeze and directives to rein in China's shadow financial system is hurting growth directly as many companies and local governments rely on this system for funding. Yet much of that money is now needed just to service debt. Trust and bond issuance by local governments, which fund much of China's fixed asset investment, has more than doubled this year but fixed asset investment is up by just a fifth. Local government loans have reached 10 trillion yuan ($1.7-trillion) – a fifth of GDP.
Alternative forms of funding are shrinking as well. As overcapacity damps profits and taxes, local governments' revenues are taking a beating. Should the property market struggle, so too will their ability to collect revenue through selling land – the collateral for much of their financing. China Confidential notes that Inner Mongolia, for example, saw flat fiscal revenue growth in the first five months of this year – far below its 14 per cent target.
Granted Chinese companies look cheap. Three of China's big four banks, which make up over a sixth of the weight of the Hang Seng index by market capitalisation, trade below book value. Bank of China now trades at 0.7 times book. But like China's GDP figures, book values could be revised down many times yet.