Fathom’s own measure of economic activity in China, our China Momentum Indicator (CMI), stood at 2.4% in April. That is unchanged from the March reading, which marked the first uptick in the CMI since Autumn 2009.
As evidence of China’s overcapacity problem continued to mount, the authorities in Beijing faced a stark choice. They could allow the credit-fuelled investment binge to continue unabated. Or they could ease off on the stimulus, and try to rebalance the economy away from investment and net trade towards the consumer, always facing the risk that growth would slow markedly, laying bare the extent of China’s non-performing loan problem. They took the second approach, and by late last year, it became clear that it had failed. Growth had slowed dramatically. According to our CMI, it was close to 2.0% – far below the official estimate.
We argued in our Global Economic and Markets Outlook for 2016 Q2 that, owing to their impatient ways, Chinese policymakers were likely to throw in the towel on rebalancing, and ‘double-down’. That meant a return to the old ways, with growth driven primarily by investment. Unchanged from the March reading of 2.4%, our April CMI adds to evidence that this may now be happening and that China’s dramatic slowdown bottomed out in February at 2.2%.
‘Doubling down’ means more wasteful expenditure on unnecessary productive capacity, and eventually more bad debts. Although this may boost growth for a year or two, it will only aggravate China’s long standing problems of excess capacity and non-performing loans.
