E The Daily Shot And Data - May 11, 2016

Greetings,

We begin with China where Deutsche Bank forecasts a rather different GDP growth path than the consensus projection.

Source: Deutsche Bank

As discussed before, the bump in the second quarter will come from the new government stimulus. As China’s private fixed asset investment (FAI) growth declines, state-owned enterprises (SOE) step in.

Source: Morgan Stanley

However, as the Deutsche Bank’s forecast shows, the impact of the stimulus will be short-lived. It takes ever-increasing amounts of debt to generate the same amount of GDP growth. There is only so much the central government can do without massively increasing public debt levels.

Note that this curve (below) is not unique to China.

Source: Morgan Stanley

Speaking of debt levels, Deutsche Bank’s China analysts worry about rising leverage in “shadow” banking.

Source: Deutsche Bank

There is also concern about the nation’s corporate debt market. China’s corporate bond demand is in part driven by short-term wealth management products (WMPs). Losses could result in panic WMP redemptions, leading to more losses.

Source: Deutsche Bank

Related to the above, China’s companies are significantly more levered than their peers in other emerging markets.

Source: Morgan Stanley?Separately, China’s crude oil imports remain robust.

Jefferies invokes Led Zeppelin in describing the country’s crude import growth.

Source: Jefferies

In the final comment on China, we note the increasing trade tensions with the United States. Political pressures, especially during the presidential election year, are likely to exacerbate this trend.

Source: @WSJ

Turning to Japan, here are a couple of updates from Credit Suisse.

1. Japan’s labor markets continue to tighten. Without adjustments to the extremely restrictive immigration policy, the demographics-driven labor shortages will cap GDP growth. A lesson for the US perhaps?

Source: Credit Suisse, @joshdigga

2. The Bank of Japan owns the JGB (Japanese government bonds) market, buying the bulk of new issuance. The central bank is also raising the duration of its holdings, thus increasing demand for duration in the market. It’s hard to see how insurance firms (who need long-term assets to match long-term liabilities) will stay in business in this environment without drastically shifting their investment strategies.