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 twelve months, we’ve seen a decline in fixed asset investment growth, a Chinese stock market move into bear market territory and the lowest level of money supply growth since records began in 1996.
Although policy has been loosened slightly in response, Chinese 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 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.
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.