The China bomb keeps getting bigger

A man participating in the traditional ritual called “Lianhuo,” or “fire walking,” in Pan’an county, Zhejiang province, in 2013.

China dropped a few bits of economic data over the weekend suggesting things will get much worse before they get better.

The most important piece of data is total social financing, or TSF.

It’s a figure the Chinese government made up back in 2011 to track all the money in the system. That includes credit out to borrowers and even parts of the country’s opaque shadow banking system.

So you can imagine why tracking this is important. As Business Insider’s Julia La Roche reported, this is what hedge fund land considers “a ticking time bomb.”

And the bomb is just getting bigger, according to last month’s tally.

TSF in January came in at a whopping $522 billion. That’s up from $276 billion in December, and it beat expectations of $337 billion. Outstanding credit grew by 12.1% from the same time a year before.

In other words, credit is still expanding at an eyepopping rate in China.

That’s not all, folks

And that may not even be the whole load either, as Bloomberg economist Tom Orlik writes:

That acceleration might even understate the pace of credit expansion. Taking account of local government bond issuance – which isn’t included in the official data – outstanding credit accelerated to 15.1%, according to Bloomberg Intelligence Economics’ calculations.

China is going through the difficult transition of moving from an economy based on investment to one based on domestic consumption.The country’s corporate entities are loaded down with debt, they’re not productive, and the economy is slowing down.

That slowdown is part of why you see the yuan depreciating – it’s what’s rocking global markets.

How we know

We know things will get worse in China because it’s still clear that corporations need this credit to survive. It’s also clear that the government is turning on all the spigots to keep the economy moving, but it’s still slowing down.

That brings us to our next data points that came out over the weekend: China’s imports and exports.

    China Exports CNY (YoY) Jan: -6.6% (exp 3.6% prev 2.3%)China Imports CNY (YoY) Jan: -14.4% (exp 1.8% prev -4.0%)

None of this will work long term. China’s troubles can’t be helped with more credit. Plus, officials are worried that if they make money even easier, that will put more pressure on the yuan to fall.

Sure enough, when this import/export data came out, the offshore yuan started to fall again.

We won’t know that they’re out of the woods until credit stops accelerating – that’s when we know the government is dismantling the bomb.