This week, in a working paper, the IMF released its latest take on China’s efforts to rebalance, confirming our view, and the finding of our proprietary China Growth Strategy measure (CGS), that China threw in the towel on rebalancing in 2017.
In recent months, this return to ‘old-model’ tactics has helped arrest the slowdown in China’s economic growth, which began late in 2017 and extended to July this year, with the latest reading from our China Momentum Indicator (CMI) unchanged from August’s 6.6%.
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Just four out of the CMI’s ten subcomponents strengthened in September, with all four (rail freight, port freight, highway freight and oil consumption) associated more closely with China’s old growth model.
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Our central scenario envisages ‘more of the same’ from China, a middle-of-the-road approach rather than a repeat of 2008–09, but as global imbalances come home to roost in the form of trade tensions with the US, downward pressure on China’s economy will test policymakers’ resolve.
To date, despite the imposition of trade tariffs, China’s exports to the US have held up, growing 13.2% in the twelve months to October. In contrast, China’s imports from the US have fallen for the last five consecutive months, resulting in a widening of the US trade deficit this year.
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Data out on Wednesday pointed to a further cooling of the domestic environment, with nominal retail sales growth in the twelve months to October slowing to 8.6% — a steady 9.2% had been anticipated. Problematically for Beijing, efforts to cushion the economy will only exacerbate existing domestic and global imbalances, increasing the risk of a ‘grey rhino’ event, a phrase coined by author Michele Wucker and recently cited in the PBoC’s Financial Stability Report, meaning a highly obvious yet neglected threat.
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