Over the past few months, the market narrative has shifted to economic stabilisation as central banks have massively stepped in in order to stimulate economic activity. Based on our calculations, more than 60% of central banks are easing globally, which is the highest level since the GFC. Many investors especially attribute the market’s rise to the Fed’s repo actions and the continued talks between China and the United States to reach a trade agreement. We even see more and more market participants talking about the potential for a rotation back to cyclicals and emerging market trades. However, in our view, short-term risks to growth remain and we would like to see a more clearly weakening USD before moving back to EM. We remain skeptical about the ability of higher central bank liquidity to revive growth in 2020 which means that fiscal push will be needed to stimulate the current business cycle.
China: wait-and-see position
In Asia, one of the most important news of the past months is that our leading indicator for the Chinese economy, credit impulse, is about to turn positive for the first time since Q4 2017. It is currently running at minus 0.4% of GDP. As China roughly represents 1/3 of global growth impulse, we could see the constructive global ripple effects of positive credit push in 2020. However, contrary to previous periods of slowdown (2008-2010, 2012-2014 and 2016), the global impact of positive China credit push is expected to be much more limited due to the following three reasons:
- Credit impulse transmission is not working as efficiently as in the past because many domestic banks are saddled with bad debts;
- Credit intensity has considerably increased over the past years. Before 2008, the country needed on average one unit of credit to create one unit of GDP. Since the GFC, 2½ units of credit are required to create one unit of GDP. It means that injecting more credit in the economy is not the miracle solution it used to be;
- The disadvantages of credit push (more debt and heavy private sector debt service ratio) tend to surpass the advantages (lower rates and higher liquidity).
On the top of that, the process of financial deleveraging has not been completely abandoned by the authorities. If we use as a proxy for deleveraging the evolution of loans to non-banking financial institutions, we see a strong jump in loans on YoY basis in 2018, at the height of the trade war, followed by a return of the deleveraging process from mid-2019 (total loans to non-banking financial institutions are out at minus 8.4% YoY in October). Except for some marginal adjustments, like it has happened in November with the cut of interest rate on the one-year MLF loans, we expect that the PBoC will be in wait-and-see position until the end of the year and much of the first part of 2020.