In the past, when efforts to rebalance have triggered a slowdown, China has thrown in the towel, opting to support economic growth while exacerbating domestic and global imbalances. This time is no different. Indeed, as we demonstrated to clients in a more detailed note, as long as near-term growth remains China’s priority, we should expect to see this flip-flopping in economic policy time and time again.
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With the Fathom measure of China’s economic activity (our China Momentum Indicator 2.0) pointing to a slowing of growth amid escalating trade tensions, we informed our clients earlier this year that China’s policymakers would resort to their old tried-and-tested strategies in a bid to support growth. Recent data and policy announcements suggest that we were right, merely marking the latest chapter in China’s hokey-cokey approach to reform.
With efforts to rebalance rarely going smoothly, it is perhaps unsurprising that China’s attempts to transition the economy from the old growth model to new-sector growth have been half-hearted, as evidenced by its love-hate relationship with credit, among others. Indeed, our research shows that growth stalls for an average of two years after other emerging markets have rebalanced. What is more, after the initial impact, we find that GDP growth remains lower than it was prior to rebalancing.
With our monthly CMI suggesting that growth peaked late last year, it is of little surprise that China’s policymakers are doubling down on their old growth strategy, again. Recent monetary and fiscal policy loosening, renminbi depreciation, and a steadying in our CMI all appear to confirm that China is prioritising short-term growth over reform.
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Indeed, the breakdown of our August CMI reveals that only four out of the ten subcomponents contributed toward the slight up-tick in our measure from 6.5% to 6.6%, with three of those — electricity consumption, port freight and highway freight — more closely associated with China’s old-model growth.
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Looking ahead, with regard to policy strategy, we expect ‘more of the same’ from China, a middle-of-the-road approach which involves neither going ‘all-in’ on its old growth model nor engaging fully in its efforts to rebalance the economy, with growth slowing further from here as a consequence. In other words, China does what it knows best, avoiding the economic realities of rebalancing while storing up problems for the future. And although that tactic delivered an upswing in growth in 2016, China’s old model is exhibiting diminishing marginal returns. For now, it is offering some support, but ultimately, with past inefficiencies taking their toll and a well-armed Donald Trump on its back, we expect growth to slow further from here, with our CMI averaging 5.9% next year.
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