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Officially, GDP growth in China has slowed from 7.4% to 7.0% over the past year. But our own China Momentum Indicator points to a much more dramatic slowdown. Rebalancing is not the cause of China’s economic woes. Far from it. China’s trade surplus in the three months to March was close to an all-time high. In spite of falling prices, and a ballooning stock of unsold property, housing construction in China continues apace. This will do little for China’s non-performing loan problem.
With its usual efficiency, China’s National Bureau of Statistics this week published its first estimate of growth through 2015 Q1, beating many other statistical agencies by a number of weeks. Officially, the headline figure showed that growth had slowed to 7.0% in the four quarters to 2015 Q1. A more timely indicator of momentum is given by the figure for growth compared to the previous quarter. This stood at just 1.3%, the weakest figure since seasonally adjusted GDP data were first published back in 2010.
As regular readers of this column will be aware, our own view is that the official data significantly understate the extent to which China’s economy has slowed, particularly over the past two years. By late 2013, both the official data and our own China Momentum Indicator (CMI) – based on Premier Li Keqiang’s three favourite measures of activity – suggested that the economy was expanding at an annual pace of around 7.5%. However, by February of this year, our CMI had fallen to just 2.8%, far below the official growth estimates.
Rebalancing is not to blame
The source of the slowdown matters. China’s authorities are keen to establish the idea of a ‘new normal’, as the country strives to move away from a model where growth is driven by net trade, to one where it is driven by domestic demand, and by household consumption rather than investment. However, other data released this week confirm that China’s reliance on net trade is still in place.
Both imports and exports fell significantly in the twelve months to March. However, taking a step back from the monthly noise, and looking instead at underlying trends, it is growth in imports that has slowed dramatically since the middle of last year, as our chart shows. In the three months to March compared with the same period one year previously, exports rose by 10%, while imports fell by 18%. China’s trade surplus, at $124 billion in the three months to March was close to an all-time high.
Over investment is the culprit
Our next chart compares the slowdown in house price inflation in China from its peak in January 2014, with the slowdown in house price inflation in the US from its peak in November 2005. If anything, it suggests that China’s housing market is cooling a little more rapidly than its US counterpart.
It is sometimes argued that China will avoid a full-blown banking crisis because of the nature of its economic and political system – the authorities simply will not allow it to happen. We have never accepted that. Accidents do happen. It is almost certain that US authorities would have intervened to save Lehman Brothers had they foreseen the circumstances. Moreover, central planners make mistakes. Investment data released this week showed that, despite falling prices, and a ballooning stock of unsold property, residential construction in China continues apace. In the three months to March, expenditure on residential construction in China was almost 6% higher than it had been twelve months previously. At the same point in the US cycle, expenditure on residential construction was falling at an annual pace in excess of 18%. Falling property prices send a signal to house builders. There is a danger that, in ignoring that signal, China’s policymakers are storing up more trouble for the future. China’s non-performing loan problem – already substantial – will become larger still.
Monetary loosening underway … plenty more to come
Total social financing – a measure of the total amount of credit extended to non-state entities – rose in March to RMB 1180.0 billion. The value of new yuan loans issued during the first quarter of this year was the second highest on record.
Nevertheless, the policy measures we have seen to date have been insufficient to prevent a dramatic slowdown in China’s economy. That suggests, to us at least, that more is to come. We continue to expect that ultimately the PBOC will abandon the dollar peg and allow the RMB to depreciate significantly. The trigger may well be the first US rate hike, which we expect to see by September.
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