Fathom’s measure of economic activity in China, the China Momentum Indicator (CMI), slowed to 4.9% in April, down from 5.1% in the twelve months to March, hitting a new two-and-a-half-year low. As highlighted in the chart, this has resulted in a widening of the gap between Fathom’s measure of growth and the official measure, which was a steady 6.4% in the first quarter of the year.
Based on Fathom’s measure, trend growth is lower than officially stated, as it has been since 2011, and that is despite financial conditions being looser than usual in China. Indeed, cuts to the reserve ratio requirement for banks, a go-to policy in times of economic weakness, have been harder and faster than at any point in recent history — including the financial crisis.
That is in stark contrast to the credit tightening enacted in 2017 through to early 2018, which was in response to China’s ‘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.
Even so, in an attempt to arrest the slowdown in underlying growth, China has resorted to its old tried-and-tested growth tactics of credit-fuelled investment. Problematically for Beijing, these efforts to cushion the economy will only exacerbate existing domestic and global imbalances.
Indeed, weaker trend growth is attributable in part to the astronomical expansion of credit observed in China in recent years, which has led to allocative mistakes at the macro level. That misallocation is evidenced by China’s non-performing loan problem, which, as Fathom detailed in a recent note to clients, is estimated to be a large and rising 28–38% of domestic GDP.
With China’s current policy mix suffering not only diminishing returns but allocative inefficiencies too, Fathom’s central scenario sees China falling into the same kind of long-term rut as Japan. In this world, despite the evergreening of bad loans and perennially low interest rates, China’s economy will slow to around 4% by 2021.
The charts in this article have been created using Chartbook on Datastream. The Chartbook was initially created by Fathom Consulting in 2012 and is now a catalogue of approximately 9000 charts, covering over 170 countries, analysing up-to-date macro and financial data. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. The Composite FVI, comprised of readings from all four underlying FVIs, is available for 176 countries in the Fathom Proprietary Indices section of Chartbook. To access Chartbook via Datastream search ‘cbook’.
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