The big story for me this week is that more and more analysts think we are in for a nasty, surprising slowdown in Chinese growth, which in turn could spark a wider Asian slowdown. If that is the case, it’ll sit awkwardly with the chatter of inflation hawks and worries about sharply rising bond yields. If Asia and China do slow down, that might actually push US Treasury yields which would undermine those central banks attempting to taper.
Cross Border Capital is amongst those research firms that are warning of a slowdown. It runs internal economic surprise measures which show that the “scale of the decline in the Asian data is worryingly fast” and is “significant”. What’s causing the slowdown? According to Cross Border “ Figure 3 highlights that China seems to be largely behind this fall, with the drop in her economic surprise index beginning from May 17th 2021, or a full month before the now-infamous US FOMC meeting that spooked investors. What’s more, the chart shows how 1-year Chinese interest rates have largely followed this declining economic surprise index lower”.
Cross Border isn’t alone in worrying about these numbers. But it’s also useful to listen to alternative voices, notably Beijing based Michael Pettis and his Global Source Partners newsletter. He’s entirely sanguine about the ‘slowdown’ worries.
“I don’t think anything substantial has changed in the past month or two. Consumption has returned a little slower than I expected because of this year’s disappointing Spring Festival, but aside from that – and it is already reversing – the Chinese economy is developing so far this year pretty much as I have been expecting.”
But many analysts are declaring a real sense of surprise but Pettis has a simple explanation: too many analysts had “ unrealistically high expectations of how the Chinese economy would evolve this year (the consensus is for GDP growth of 8.5 percent). Already analysts are starting to lower their growth estimates for the year.”
That said, Pettis accepts that there has been a credit slowdown but that it is not nearly as dramatic as the year-on-year numbers seem to suggest.
“9.3 percent [credit growth], I would argue, is a reasonable credit growth rate for this year. It is much lower than that of previous years (2017: 14.1 percent; 2018: 10.2 percent; 2019:10.6 percent; and 2020: 13.3 percent), but this is because I expect real GDP growth in 2021 to be somewhere between 6 percent and 8 percent – probably closer to 6 percent than 8 percent – in which case 9.3 percent growth in TSF would be roughly in line with expected nominal GDP growth for 2021. If credit and nominal GDP both grow at roughly the same rate in 2021, there would be no significant change in China’s debt-to-GDP ratio, which is what I have been expecting since the beginning of the year and what Beijing has promised”.
Put simply, the Chinese economy and credit growth “is slowing from the late surge last year and earlier this year exactly as we should have expected” making it “very unlikely that China will reverse its concern about debt any time soon, although because political concerns always trump economic and financial concerns we can never be sure that Beijing will not change its mind. For now, it is best to assume that Beijing will continue trying to restrain credit growth this year to 9.0-9.5 percent and allowing nominal GDP growth to come it at roughly the same level“.