China braces for a slowdown

Investors “may be caught out by a slowdown in China” this year, says The Economist’s Buttonwood blog. It is unlikely to be “anything dramatic”, says Absolute Strategy Research’s Ian Harnett and David Bowers, but China looks on track for annual growth of about 6% this year, rather than the 6.7% widely expected. That implies global growth of 3.3% rather than 3.5%. Higher interest rates and stricter lending rules will temper credit growth and activity. In October, house prices in Beijing and Shanghai were down year-on-year.

Time to tackle debt

Given its enormous and growing debt pile, China is having to walk a tightrope. It “can’t loosen but… can’t tighten too much either”, says analysts at Singaporean bank DBS. It helps, for now, that inflation is just 1.6%, so the central bank doesn’t have to raise rates further. What’s more, adds Morgan Stanley, “growth is turning more self-sustaining, with robust consumption and external demand”; China’s debt-to-GDP ratio can stabilise by the second half of next year.

But the economy has already paid a heavy price, says Wirtschaftswoche’s Malte Fischer. The leadership’s decision to prevent recessions with doses of stimulus to preclude social unrest has prevented overcapacity being eliminated and capital being allocated efficiently. Businesses that should die off are kept alive, clogging up bank balance sheets with unproductive loans. Around 15% of firms are “zombies”. And the demographic backdrop suggests that there is a danger of China getting old before it gets rich. Throw in the government’s controlling, statist approach, and it’s hard to see the country becoming the world’s top economy.

A helping hand

The jury is out on the government’s capacity to head off a debt crisis, but note how much the external environment has helped of late, says Nathaniel Taplin in The Wall Street Journal. The first dip in the corporate debt-to-GDP ratio since 2011 is not so much “a triumph of domestic policy-making” as a boost from strong global growth. Since the early 2000s, changes in the debt-to-GDP ratio have been inversely related to the changes in the growth of exports.

Between the beginning of 2016 and the third quarter of 2017, net exports added 1% to GDP growth, making up for lacklustre investment and nudging the overall expansion up to 6.8%. Without that boost the “drive to contain debt” would have been “far more painful”. So only when the world economy cools will we learn whether the new administration under Xi Jinping can gently deflate the debt bubble.