BOE: China is “not going to bail us out this time”

Bank of England chief Mark Carney has some bad news for Australia, warning that:

“(China) are not going to bail us out this time, I absolutely agree,” Carney said when asked about the ability of the world’s second-biggest economy to compensate for a slowdown in richer nations. But the most likely outcome was that the world economy would not slow much further, he said.

“While there are pockets of risk and global growth is still decelerating, the combination of the policy response and the state of the current imbalances in advanced economies suggest that global growth is more likely than not to stabilise eventually around its new, modest trend,” Carney said.

The speech is actually worth reading in its entirety, if only to illustrate what a pack of bullish muppets are the RBA. Here is the China section:

The second reason for caution is the possibility of a more material slowdown in China.

China is the one major economy in which all major financial imbalances have materially worsened. It may be the exception that proves the rule that financial imbalances cause recessions.

While China’s economic miracle over the past three decades has been extraordinary, its post-crisis performance has relied increasingly on one of the largest and longest running credit booms ever, with an associated explosion of shadow banking.

Total Social Financing has increased from 120% to 223% of GDP since 2008. In parallel, the non-bank financial sector has increased from around 20% of GDP to over 70% today, with developments echoing those in the pre-crisis US including off-balance sheet vehicles with large maturity mismatches, sharp increases in repo financing, and large contingent liabilities of both borrowers and banks.

Chinese authorities have begun taking measures to manage these risks. Growth in Total Social Financing is now in line with that of nominal GDP (Chart 10). The shadow banking sector is being restructured. But there is a tension between reducing the risks from high debt and supporting the economy.

A downturn in the Chinese economy would test the resilience elsewhere. China’s contribution to global growth has risen from one-fifth to one-third since the last US tightening cycle.

To give a sense of the issue, in the 21 credit booms that matched the scale of China’s since 1975, annual growth dropped by 3¼ percentage points on average in the subsequent years. Adjusting for progress thus far and China’s degree of development, this suggests growth could slow a further 1 to 1½ percentage points.

Of course, deeper trade tensions would worsen the slowdown.

The Bank of England estimates that a 3% drop in Chinese GDP would knock one per cent off global activity, including half a per cent off each of UK, US and euro area GDP, through trade, commodities and financial market channels. A harder landing would have significantly larger effects, as these channels would likely be accompanied by negative spillovers to global confidence.

I’d agree with that. China won’t be stimulating enough until another global shock (perhaps caused by itself) strikes.

David Llewellyn-Smith
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