China – stability may be necessary and sufficient. A strong print in Q4 growth rounded off the solid recovery we have seen in Chinese GDP through 2020, and it is important to reiterate that a robust growth backdrop in China is a key ingredient ofour pro-cyclical stance across global markets. It is often forgotten that an important reason why the ‘taper tantrum’ was as painful for EM was that it came against a backdrop of a step down in China growth from the post-GFC double-digit surge and accompanying credit binge. With China’s economic recovery further advanced compared with other parts of the world, we do expect a more stable growth profilein 2021, rather than the acceleration that is pencilled into our growth forecast in the rest of the world. Stability at a robust level may be sufficient, but a world in which China growth was to slow more sharply from current levels and the US accelerate on the back of more hefty fiscal stimulus would be an unwelcome twist to our pro-cyclical, pro-commodity and pro-EM views. So it will be important to watch the recent slowdown in the credit impulse, although some of that may simply be areversion to the norm where policymakers throttle back on the domestic credit impulse when the export outlook is strong. At any rate, with policy rates having moved back higher as well, there is room to ease policy in response to any unexpected downside shocks; and we would also expect policymakers not to delay responding in the first year of a new five-year plan and in the centenary year of the founding of the Chinese Communist party.
That is exactly what is coming in H2, in my view. And it is unwelcome to the reflation bulls even if China eases rates because CNY will turn lower, taking EUR and EM currencies with it. DXY will rise and lowflation storm back.
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This represents a clear and present danger to the great value rotation underway in equities though it would be bullish for growth stocks.
Here is the rolling Chinese credit impulse:
Ironically, the greatest hope against this may be the current outbreak of virus which could precipitate more fiscal stimulus…