There is growing evidence to suggest that, with Xi Xinping having consolidated his power base at the Communist Party Congress last year, the priorities of the Chinese authorities going forward will be profoundly different to the ‘growth at all costs’ mantra of the last decade.
From the ‘Minsky moment’ comments made by China’s central bank governor, through to the cancellation of several massive infrastructure projects, 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.
This year we’ve already seen a surge of corporate bond defaults, demonstrating that these risks are starting to surface. Although monetary policy has been loosened slightly in response (for example the People’s Bank of China reduced the reserve ratio requirement for banks so they can lend out a higher proportion of their deposits), Chinese policymakers no longer have the firepower to sustain an artificially high growth rate supported by excessive credit expansion. China’s leadership is 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.
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. Already, we’ve seen indications of a Chinese economy slowdown, such as disappointing trade data, a decline in fixed asset investment and the lowest level of money supply growth since records began in 1996.
Consequently, we believe we’ll see progressively slower growth from China in the months and years ahead, as the country faces up to its massive bad debt problem and exports deflation to the rest of the world via its currency.