China: another dose of stimulus?

China's government is trying to wean the economy off its dependence on credit.

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The HSBC-Markit manufacturing purchasing managers' index, a widely watched Chinese data series, slid to an eight-month low in March. It has now been below 50 (indicating a shrinking manufacturing sector) for three months. Weak domestic demand was the main culprit.

The weak reading was especially disappointing, because activity in March usually bounces back from February's Chinese New year celebrations. After several weeks of poor data, Nomura and Socit Gnrale now expect annual GDP growth to ease to around 7% in the second quarter. The government has set a target of 7.5% for the full year.

What the commentators said

They usually do this by lowering the reserve requirement ratio, the amount that banks have to keep in reserve rather than lend out.

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But don't count on a stimulus, said Capital Economics. The government is trying to wean the economy off its dependence on credit-fuelled investment, and will be reluctant to stimulate until there are signs of weakness in the labour market, their "primary concern".

So far that is holding up fine. And the danger of another stimulus, as Alex Frangos pointed out in The Wall Street Journal, is not only that it will inflate the credit bubble of recent years further, potentially leading to an even nastier bust later, but that it's also becoming less and less effective.

"Debt is like alcohol, in that the more often one drinks, the more servings it takes to get drunk." Credit efficiency, or "the jolt" an economy gets per yuan of debt, has plunged since 2008, and many firms now borrow to repay old loans rather than creating new activity.China is reaching debt saturation point.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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