Back to old play­book

The tide has turned for the Chi­nese econ­omy, and global trad­ing pat­terns are chang­ing with it

Financial Mail - - DIAMONDS & DOGS - Tim Co­hen

For close to two decades,

China has pulled global growth up­wards. Though still grow­ing fast, the rate of growth of the world’s sec­ond-largest econ­omy is now de­clin­ing, and that is pulling ag­gre­gate global growth down­wards, qui­etly up­end­ing a myr­iad busi­ness and trade pat­terns.

China now looms so large in the global econ­omy that when it sneezes, oth­ers catch a cold. Cor­rected for cur­rency fluc­tu­a­tions, the Chi­nese econ­omy is the same size as those of In­dia, Ger­many, Ja­pan and Rus­sia com­bined. But China’s an­nual growth has dropped steadily, from 10.6% in 2008 to 6.6% in 2018, and it is now de­clin­ing faster than ex­pected.

This means the growth gap be­tween China and the av­er­age of de­vel­op­ing economies around the world is lower than two per­cent­age points for the first time in al­most 50 years, ac­cord­ing to

IMF fig­ures.

The most ob­vi­ous change is in the coun­try’s trade sur­plus with the rest of the world, which has plum­meted to a frac­tion of its former glory. This is partly a mat­ter of de­lib­er­ate pol­icy, as Chi­nese au­thor­i­ties have en­cour­aged cit­i­zens to spend more at home to hold the growth rate up.

As Chi­nese spend­ing has in­creased, the coun­try’s sav­ings rate has de­clined, and that will have huge im­pli­ca­tions for debt mar­kets. In­ter­na­tion­ally, China has been a huge buyer of for­eign as­sets such as US trea­suries, but that flow is now re­vers­ing.

It’s not only the de­cline that’s a prob­lem; the sur­pris­ing rate of the de­cline is pro­vid­ing Chi­nese pol­i­cy­mak­ers with ter­ri­ble headaches. Ac­cord­ing to the Bank of In­ter­na­tional Set­tle­ments, the level of credit in Chi­nese non­fi­nan­cial busi­ness is now about 155%, com­pared with the G20 av­er­age of about half that. For fast-grow­ing busi­nesses, it is en­tirely ra­tio­nal to bor­row heav­ily, but at some point bor­row­ing more to in­crease pro­duc­tion hits a ceil­ing, so

Chi­nese au­thor­i­ties are now en­cour­ag­ing “delever­ag­ing”.

That im­pulse would nor­mally re­quire in­ter­est rate in­creases, but to main­tain over­all growth rates, the Peo­ple’s Bank of China has in­stead kicked off 2019 by cut­ting the re­serve re­quire­ment ra­tio (RRR).

Stan­dard Bank an­a­lyst Jeremy Stevens says in a note to clients that, true to form, mar­kets ral­lied in re­sponse — es­pe­cially in­fra­struc­ture-re­lated stocks — as cut­ting the “RRR is seen as a sign that Bei­jing is pre­par­ing to go back to the old play­book”.

He adds: “Bei­jing ex­pects 2019 to be a dif­fi­cult year. Do­mes­tic sen­ti­ment is weak, and news flow is likely to de­te­ri­o­rate fur­ther.”

Bloomberg/qi­lai Shen

Pedes­tri­ans walk past the Bund Bull statue in Shang­hai

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