Head of Macroeconomic Research
Summary: This is certainly one of the most important charts explaining why China will not open massively the credit tap anytime soon.
Using BIS credit data, we have calculated China credit intensity since 1994. Before the Global Financial Crisis, China needed on average one unit of credit to create one unit of GDP. Since 2008, 2½ units of credit are required to create one unit of GDP. In other words, it means that China needs much more credit than 10 years ago to have the exact same amount of GDP. Injecting more credit in the economy is not the miracle solution it used to be, and the disadvantages of credit push tend to surpass the advantages.
Higher credit intensity over the past years has directly fueled the debt engine. Public and household debts are at their highest historical levels, respectively at 51% of GDP and 53% of GDP, and the private sector debt service ratio is becoming a burden for many companies, reaching on average 19.7% This records an increase from 13% before the crisis.
On the top of that, the PBoC will probably refrain from massive easing as long as the real estate sector remains well-oriented. It is a key economic sector for China’s growth as it represents around 80% of Chinese people’s wealth. Completed investment growth in real estate has decelerated since last spring, but it is still at high level compared with previous years, running slightly above 10% YoY in last September.
We believe that high credit intensity combined with resilience in the real estate sector will push the PBoC to be in wait-and-see position until the end of the year and to adopt a fine-tuning policy in 2020 if needed. Contrary to previous periods of slowdown, notably in 2008-2010, 2012-2014 and in 2016, China is unlikely to save the global economy once again.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
