…two challenges brought us here.
Internally, policymakers’ efforts to constrain the growth of shadow banking and reduce financial risks worked almost too well. Financial regulations introduced in 2017 and early 2018 led to a meaningful contraction in shadow banking, which slowed overall credit growth and tightened credit conditions, particularly for private companies.
And externally, the escalation in US tariffs raised questions about China’s export growth and damaged confidence in the economic outlook. As a result, our China Current Activity Indicator (CAI) has fallen nearly two percentage points from its 1H2018 average of over 7%.
I do think policymakers have a better understanding of the macro problems and risks today. They also have a greater appreciation for the side effects of policy stimulus, which seems to have made them less willing to ease aggressively. They don’t want to do more than necessary to support growth.
There are reasons to be concerned. Local government officials who typically implement infrastructure spending and other forms of stimulus are facing conflicting pressures. The emphasis in recent years on reducing off-balance-sheet borrowing, selecting only higher-value projects, and eliminating corruption has made local officials more cautious. But at the same time, the authorities are now encouraging local officials to do more to support growth, like accelerate infrastructure projects. President Xi himself recently acknowledged the incentive problems and administrative burdens facing local officials.
Growth is likely to slow a bit further, given that the credit cycle is still a drag and stimulus is ramping up relatively slowly. Chinese exports have also benefited from some frontloading, given that until recently it looked like US tariffs might increase in January; the payback for that in early 2019 will likely shave as much as 20bp off of GDP growth. Nonetheless, we expect growth to firm up in the second half of next year. Remember that China’s GDP growth is not only a measure of economic performance, but also a formal target that matters for credibility.
We should expect a ‘new normal’ of persistent and consistent tensions. Although cooperation between the two countries will continue, it will be difficult, episodic, and limited to big global questions.
That’s too optimistic. For China to bounce in H2 next year they would need to putting pouring out the stimulus now.
This is actually a classic Chinese cycle. Ease monetarily in increments and watch as the economy keeps sinking. Add bits of fiscal stimulus and watch the economy keep sinking. Then panic and add great gobs of both resulting ever more death by debt. Rinse and repeat.
We’re not there yet and growth will not be slow enough to trigger the Pooh panic until Q1 or even Q2 2019.