China is sliding into a manufacturing recession as a wave of bond defaults sweep through the corporate sector, signalling yet further trouble for the battered global economy.
The official PMI survey for December slumped below the boom-bust line to 49.4. New export orders slid to crisis levels of 46.6 last seen in the depths of the Chinese currency scare of 2015."The worst is yet to come," said the Japanese bank Nomura.
The autumn boost by Chinese exporters is fading: they have already "front-loaded" shipments to the US to beat a possible jump in tariffs by the Trump administration.
The Japanese bank warned in its 2019 outlook that China is leading much of east Asia into a "credit crunch" as global liquidity drains away, with property slumps and outright deflation in several countries over the next few months.
This will lead to the "third and final wave of a bear market", followed by a roaring recovery in the second half of the year as Beijing abandons attempts to deleverage and the US Federal Reserve abandons monetary tightening."It is always darkest before dawn," said Rob Subbaraman, Nomura's emerging markets chief."We expect the current account surplus, export-reliant economies - Greater China, Korea, Singapore, Thailand and Malaysia - all of which have high private debt, to be at the core of this turmoil," he said.
The picture is already darkening rapidly in Hong Kong where property prices dropped by 3.5 per cent in November, the steepest one-month fall since the Lehman crisis in late 2008.
The enclave is being squeezed by the strong US dollar and Fed rate rises. Three-month Libor rates have doubled to 2.78 per cent over the last year.
This has forced up Hibor rates used to price swathes of property lending in the Hong Kong.
The cyclical ups and downs of China's economy have become a crucial factor for the global economy, determining commodity prices and emerging market growth rates.
The current slowdown is a key reason why the eurozone has hit a brick wall, with both Italy and Germany flirting with possible recession.
This is fully understood by "global macro" hedge funds but not yet by the broader public, or, all too often, by the policy classes in the West who still rely on old "pre-China" notions of how the world works.
The strains are mounting in China's corporate sector. Defaults tripled to a record 119 in 2018, according to Wind Information. The Ningbo property developer Yinyi Co is the latest to run into trouble as liquidity evaporates, failing to redeem its three-year bonds last week.
The scale of defaults is still relatively small at $17bn (£13.2bn) this year. Moreover, the willingness of regulators to let companies fail is arguably a good sign. The reflex until 2014 was to put together some sort of rescue to shore up confidence, disregarding endemic moral hazard.
Yet the Communist authorities are walking a fine line as they seek to -deflate a credit bubble that has pushed the ratio of corporate debt to GDP from 95 per cent to 160 per cent in a decade. The managed slowdown is proving hard to stabilise.
The task is made almost impossible by an escalating trade war with the United States one that is mostly a nuisance so far but could turn deadly serious this year.
The People's Bank has cut the -reserve requirement ratio four times over the last year to shore up the banking system.
This stimulus has yet to gain much traction in the real economy. Janus Henderson says its measure of "real M1" money growth - stripping out noise - has collapsed to zero on a six-month basis.
The Capital Economics gauge of underlying economic growth dropped to 5 per cent last month based on a range of proxy indicators.
This is far worse than the "smoothed" official figures.
Capital Economics expects the rate to drop to 4 per cent by mid-2019 before fiscal largesse feeds through, and even then the rebound will be a much-reduced version of earlier stop-go boomlets. "Policy stimulus should put a floor beneath growth before the year is out but won't drive a strong recovery," it said.
A blizzard of data suggests that China's industrial sector buckled abruptly in November, although services are holding up better so far. Chinese car sales fell 16 per cent from a year ago. Air cargo contracted.
Industrial profit growth dropped to minus 1.8 per cent.
The damage is evident in last year's crash of CSI 300 index of equities, down 32 per cent since late January 2018. All ten industrial sectors are in deep contraction.
Beijing is pushing through tax cuts and infrastructure spending after a policy shift at the Central Economic Work Conference before Christmas.
Local governments have been told to speed up bond issuance for projects.
Yet it cannot keep relying on fresh credit. The economic potency of new debt has collapsed by three quarters since the boom years of the early 2000s.
The balance of risk and reward has turned starkly negative.
The great unknown is whether the truce in Donald Trump's trade war with China will lead to a deal.
He tweeted over the weekend that talks with Chinese leader Xi Jinping were nearing a breakthrough.
"Deal is moving along very well," he claimed. "If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!"
But markets will believe it when they see it.
- The Daily Telegraph