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Accelerating slowdown
The slowdown in the Chinese economy is becoming more pronounced. Widespread excess capacity dampens the short-term outlook and the much-touted reform process is stalling. Meanwhile, financial risks are accumulating. The government is trying to stimulate the economy via targeted monetary policy and perhaps via the exchange rate. But wholesale credit easing is avoided for fear of financial instability. Although a pick up from August to September helped make Q3 GDP growth stronger than feared, the October data indicated that the slowdown resumed in Q4. The November PMIs furthermore suggest a continued slowdown in November.
Excess capacity the immediate cause
Housing construction has been running ahead of demand for a few years. This year’s sharp drop in dwelling prices made it abundantly clear that this state of affairs could not last. Working off the current inventory may take another two ears. The similar, though somewhat less dramatic, slowdown in manufacturing investment should not come as a surprise in view of the government’s attention to the build up of excess capacity, especially in steel, cement and glass production, all sensitive to real-estate construction. The Chinese fixed-asset investment data are presented mainly as year-on-year growth rates of aggregate activity year-to-date. Each new growth rate then presumably reflects not only the growth contribution from the most recent month, but also revisions to the earlier months. However, if these revisions are small, a declining y-o-y growth rate for the year-to-date data implies an even sharper slowdown in the underlying y-o-y growth rate for the individual months. We show these implied growth rates in the graph below.
Reform process stalling
The ambitious reform plan, announced by President Xi Jinping with much fanfare a year ago, has hardly out of the starting block. The resistance to change is obviously strong and Xi’s honeymoon is over. The main topic for this year’s Fourth Plenum was the rule of law, which, at first glance, would seem highly appropriate. In fact, the decisions made actually promise some improvements in terms of the predictability of local business conditions. However, the supremacy of the central party leadership has not been questioned. The other big item on President Xi’s reform agenda is his fight against corruption. This fight appears to be real, although we suspect that it is designed to hit Xi’s political opponents just as much as cleaning up corruption across the board. Furthermore, although corruption certainly Fixed-asset investment slowing in response to overcapacity in housing and manufacturing Reforms stalling as Xi’s honeymoon is over The fight against corruption paralyses decision-making
