The Chinese economy is now dealing with the legacy of a decade of credit-fuelled infrastructure development, which leaves it with an enormous debt burden and substantial amounts of misallocated capital. Going forward, this legacy will, in our view, result in much lower growth and a much more difficult domestic economic agenda.
From the ‘Minsky moment’ comments made by China’s central bank governor, through to the cancellation of several massive infrastructure projects and the crackdown on shadow banking, there have been a number of tangible signals to suggest that the Chinese authorities are no longer prepared to ignore the economic risks that have accompanied several years of unbridled credit expansion.
Against a backdrop of rising trade tensions, the economic implications of this are clearly not positive for China, nor for the rest of the world. Over the last eighteen months, we’ve seen a significant decline in fixed asset investment growth, a steady slowdown in retail sales growth and the lowest level of money supply growth since records began in 1996. Meanwhile, it is estimated that there are more than 65 million empty properties in China, which is equivalent to half of the entire US housing stock.
Policy has been loosened slightly in response, which has been enough to prompt a rapid but speculative stock market recovery. Official economic data appears to have stabilised in recent months, but other, less malleable data points (such as China car sales as an indicator of domestic demand, and industrial production in other Asian economies that are dependent on Chinese growth) provide a better reflection of what is really happening and the numbers remain troubling.
Notwithstanding the recent modest stimulus, China’s long-term structural economic problems remain daunting. Policymakers seem to have acknowledged that they no longer have the firepower to sustain an artificially high growth rate supported by excessive credit expansion. China’s leadership remains intent on reducing debt as part of its longer-term objectives, but one thing is clear from economic and financial history – there is no such thing as a painless deleveraging.
Whichever way China turns now, looks likely to result in either intentional or inadvertent renminbi weakness, which will consequently turn a domestic deflationary problem into a global phenomenon.