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 have become 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 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. This year, we’ve seen a decline in fixed asset investment growth, a surge in corporate bond defaults 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.
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.