Saxo Global Credit Impulse Update: China
Head of Macroeconomic Research
Summary: Contrary to popular belief, political risks and trade wars are not the greatest threats to the global economy. However, the divergence of monetary policy between developed countries and China is something we really should worry about.
Debt-based growth is extremely vulnerable to any decline in the flow of new credit. This is exactly what we are experiencing.
The disappointing economic data we have seen in previous months are the direct consequence of negative global credit impulse in 2017, driven by China’s deleveraging process and, to a lesser extent, by the Brexit effect on the UK. Looking at the most recent credit data, the main area of strength at the global level is China. The country roughly represents 1/3 of global growth impulse.
The United States is struggling with a negative credit impulse, resulting from the normalisation of monetary policy, and the euro area is facing a sluggish trend with credit impulse reaching only 0.2% of GDP, moving lower due to downwards revision of GDP. The rise in the global credit impulse at the beginning of 2018 to 5.3% of GDP was due largely to China’s stimulus policy, which has been triggered to offset the impact of trade war. Overall, global credit impulse remains quite weak compared to its previous 2016 peak.
We expect China's credit impulse to slightly increase in coming quarters, as indicated by the sharp jump in YoY loans to non-banking financial institutions since past May. September data indicate it has increased by a stunning 58% compared to September 2017. However, the impulse should be more limited than in previous stimulus period. We used to be sceptical when we hear that “this time is different” but, for once, this time is really different for China, for three main reasons:
1. China will certainly be reluctant to open the credit taps too much, which could ruin its efforts to cut back on shadow banking.
2. China’s economy is less dependent on exports and, thus, more resilient to trade war than years ago. Exports account for only 18% of China’s GDP, compared with nearly 35% in 2007. China’s economic transformation pushes for the implementation of a fine-tuning policy rather than another 2009-style stimulus.
3. In previous China credit impulse peaks in 2009, 2014 and 2016, monetary policy was still very accommodative at the global level, which has certainly increased the net positive effect of the Chinese stimulus.
As a consequence, in our view, one of the top downside risks to growth is not linked to political risk or trade war but to the current divergence of monetary policy between developed countries and China that will limit the positive impulse on global growth from China stimulus. In the best-case scenario, China will be able to support its economy but the virtuous effect of China stimulus on emerging countries and at the global level may be much more limited.
Weak global credit impulse is not yet a new signal confirming the risk of global recession. It would be rather a bold call at this stage. We need more time to assess the exact magnitude and the real impact of China’s stimulus policy, but we can at least safely state that low credit impulse suggests we are moving inexorably into slowdown and we are dangerously approaching the end of the business cycle which started in 2009, almost 10 years ago.
Latest Market Insights
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.