The FT’s Gavin Davies takes a look today at China’s hard landing today:
…The latest monthly batch of data showing that the underlying growth rate in activity (according to our “nowcast” models), has dropped sharply to only 5.3 per cent. This is much lower than the government’s informal 7 per cent growth target, and may also be lower than the growth rate needed to stabilise employment.
What comes next? One option seems to have been ruled out: devaluation of the RMB exchange rate.
But elsewhere the politburo’s latest economic statement outlines a series of expansionary fiscal and monetary measures, with an urgent tone that seems very different from what has come before under President Xi.
…But the really important new development is the use of the central bank balance sheet to provide liquidity to banks so that they can collateralise the new municipal bonds that are refinancing LG debt. Under the current phase of this programme, Rmb 1tn is expected to be refinanced, which amounts to about half of the maturing LG debt in 2015. This is 5 per cent of all outstanding LG debt (1.4 per cent of GDP). But it is only a toe in the water. Some analysts think that the eventual programme will be five times as large, and will kick the problem of refunding the LG debt mountain several years down the track.
The battle to defeat deflationary forces in China has now been well and truly joined. The world will watch with bated breath as the authorities struggle to overcome the threat. They have sufficient ammunition to succeed.
This is a terrific summary and I recommend reading the whole piece. However, I disagree with the conclusion. China does not have the ammunition to succeed if it wants to rebalance before it is forced to via crisis. That means lot’s more stimulus but still paced against a glide slope of slowing growth. Any rebound – and there is scant evidence of one yet – will be measured in quarters not years.
The battle against deflation will be waged with this in mind and recent accelerating stimulus measures do not yet break that mold.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
