Chart of the Week : China Credit Impulse
Head of Macro Analysis
Summary: Our proprietary leading indicator for the Chinese economy is back in positive territory for the first time since the end of 2017, and it confirms our positive narrative for the global economy.
In today’s edition, we focus on the Chinese economy. The latest data released tend to confirm a cyclical rebound is at work. In last December, there have been a massive jump in imports (+17.7%) and in exports (+9%) in CNY terms. On the top of that, inflation (PPI and CPI) is finally at a turning point. We expect that the rebound in PPI will continue and that PPI will turn positive in Q1 while higher CPI is likely in the short-term due to stronger demand for pork in January ahead to the Spring Festival that will take place the last week of January. However, afterwards, we should see lower CPI will could give more room for maneuver to the PBoC.
The improvement in data is consistent with our leading indicator for the Chinese economy, credit impulse, which leads the real economy by 9 to 12 months. It is back in positive territory for the first time since the end of 2017, running at 0.7% of GDP (chart below). This is certainly one of the most important macroeconomic news of the past months. As China represents about 1/3 of global growth impulse, positive credit impulse means we could see the constructive global ripple effects in the coming months.
We believe China’s growth will significantly improve in Q2 2020 on the back of positive credit push, lower political risk and more debt stimulus. The US-Chinese trade deal won’t solve all the issues, but it should help both countries to focus on stimulating domestic growth. Over the past few hours, we have had more information regarding the details of the agreement. One of the main Chinese commitments is to purchase $200bn of goods ($75bn for manufacturing goods, $50bn for energy, $40bn for agricultural goods and $35 to $40bn of services) but, as mentioned previously by our Head of Commodity Strategy, Ole Hansen, such an amount is unlikely to materialize.
We also see that China is tapping further the bond market: based on preliminary data, the local government bond issuance for January is three times the 2019 level and 70% of bonds that will be issued this year will be infrastructure bonds versus 35% last year. China is also fueling the housing market bubble which is key for China’s growth as it represents roughly 70% of Chinese’s people wealth. In a move to encourage urbanization, China has recently decided to scrap residency restrictions in some smaller cities and it plans to build a record 20 million apartments this year, which is nearly twice the number of new births. In 2020, it seems that China is inclined to prioritize growth over debt, which is ultimately positive for the global economic momentum.
Access to MacroChartmania.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.