The latest reading from Fathom’s China Momentum Indicator (CMI) suggests that China’s economic growth slowed sharply to 6.4% in the twelve months to November, with all but two of the ten sub-components exerting a drag. In our view, this slowing is not a consequence of economic rebalancing. Indeed, prompted by the CMI pointing to a slowing of growth amid escalating trade tensions in 2017, we have long argued that China’s policymakers would lean more heavily on old-model growth, throwing in the towel on rebalancing, in a bid to support the economy.
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While we agree with mainstream media that China’s economy would slow if it were rebalancing, as we explained in a recent note to clients, ‘China’s hokey-cokey approach to reform’, we find very little evidence to suggest that China’s policymakers are re-orientating the economy, or that the recent slowdown in growth is a consequence of that effort. Indeed, the sub-components of the CMI most closely associated with China’s old growth model gained momentum through 2017–18 following a half-hearted attempt to rebalance in 2015–16, as the bar chart below highlights.
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Both aviation and real retail sales growth, the sectors more closely aligned with the consumer, stand out as having lost steam since 2015, a trend supported by our proprietary measure of China’s relative consumer goods and services demand (a sub-component of our China Growth Strategy which was created last year for a bespoke consultancy project and presented to clients for the first time in Q3’s Global Economic and Markets Outlook).
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Also captured in the bar chart is the average annual growth in China’s oil consumption, which appears to be weaker than in 2015, perhaps reflecting the fact that in mid-2015 China reduced restrictions on crude oil imports, granting licences to refineries, as well as China’s pursuit of ‘green’ initiatives in recent years.
Meanwhile, efforts to curb credit (reflected in the real total social financing category) appear to be dwindling. 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 — with last week’s announcement the latest in a series of easing measures and in stark contrast to the credit tightening enacted in 2017 through to early 2018.
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That return to old-model tactics may arrest the slowdown in China’s economic growth for a short while, as supported by the CMI in recent months, but as November’s data imply, it will not suffice to shore up growth permanently. We expect economic growth to slow further from here.
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