This is the final instalment in a series of three News in Charts highlighting the first series of Fathom: In Conversation, an economics podcast from Fathom Consulting. In the series, Fathom’s economists discuss findings from their research to tell a detailed story about China’s emergence and its impacts on the global economy.
Part 1 (The rise of China) provided an overview of the first four episodes, covering China’s rapid economic expansion and its effects not only on the real standard of living for China’s population but also on advanced and emerging economies across the globe. Part 2 (The rise of China — a unique phenomenon) discussed the role China played in the global financial crisis, how policymakers have managed to sustain growth in the face of global headwinds, and the growing international tensions caused by the emergence of the People’s Republic.
Episode 8 (China, ready for a diet?) explores these themes further, with Andrew Harris and Joanna Davies questioning the sustainability of the huge excesses in China’s economy and asking whether the country needs to embark upon an economic diet after years of overindulging.
While policymakers recognise the issues associated with the country’s export- and investment-led growth strategy, and often make noises about rebalancing towards a healthier, more sustainable growth model, little progress has been made. To monitor this, Fathom created the China Growth Strategy (CGS) indicator, which measures China’s progress in terms of internal, external and financial rebalancing.
It shows that China pursued the ‘old model’ aggressively through the 2008/09 financial crisis, increasing the supply of credit and fuelling an investment splurge large enough that economic growth slowed only momentarily according to both our measure of underlying activity (Fathom’s China Momentum Indicator — CMI) and China’s official GDP statistics.
Thereafter, as explained more thoroughly in a series of research notes available to clients (see www.fathom-consulting.com), China’s policymakers were forced to curb bank lending and tighten interest rates. What ensued was a rapid expansion in unofficial channels of credit growth, depleting credit efficiency.
Further attempts to cool credit growth and reduce over-investment derailed the economy and by 2015 growth was too low for policymakers to bear, causing them to throw in the towel on their half-hearted attempt to rebalance. The CGS confirmed that view, and still does in the round, although in terms of credit, China tightened in 2017 through to 2018.
Episode 9 (Doubling down at the double) acknowledges the fact that even during times of turmoil in the global economy, China has managed to maintain impressive economic growth. However, while official GDP statistics have remained remarkably smooth, Fathom’s CMI paints a far less rosy picture, pointing to significant slowdowns both in 2008/09 and in 2015. In this episode, Andrew Harris, Laura Eaton and Joanna Davies draw insights from the CMI and CGS and outline the actions policymakers have taken when economic activity has slowed.
The CMI combines ten monthly indicators to provide an accurate assessment of economic activity in China. In 2013-15, Fathom reported a major divergence between official statistics and the CMI indicating a steep slowdown long before it was widely recognised. Following a policy misstep in 2015, financial markets woke up to the severity of China’s slowdown, with oil and other commodities prices falling. In response, China’s policymakers doubled down on old growth methods, further adding to long-term problems of domestic imbalances and non-performing loans.
Fathom refers to this process as ‘doubling down’ as each time growth slows, policymakers take a gamble and return to the old growth model, ultimately increasing the stock of debt in the economy and upping the already-high stakes. Added to this, the more policymakers play this ‘game’, the less bang they get for their buck. This is clearly a risky game to play and there is a significant risk that one day they may lose the bet.
In the final episode (Back to the Future), Andrew Harris and Erik Britton look towards the future and explore potential repercussions for the global economy if Chinese policymakers continue reverting back to their old growth model.
When faced with a problem considered too complex to explain, it is tempting to wave the problem away with technical jargon. For example, in the film Back to the Future, time travel is made possible simply by the existence of ‘The Flux Capacitor’, whatever that may be. Some of the greatest puzzles of modern-day economics — weak productivity, ultra-low interest rates, persistent inflation undershoots — are often given a similar treatment. However, there is a case to be made that China is the missing piece of the puzzle and, rather than simply dodging the issue, Fathom attempts to tackle it head on.
Previous episodes discussed how China’s vast excess savings caused major distortions to the global economy in the build up to the global financial crisis of 2008/09. With growth slowing again in 2019, Fathom has run simulations through its proprietary Global Economic Strategic Allocation Model (GESAM), to assess the potential impact of China reverting to its old growth tactics to fuel growth in its economy. While the exercise indicates that China’s actions could keep a lid on inflationary pressure and stave off the threat of a global recession in the near term, Fathom believes that such an outcome could set in motion the start of another credit cycle, similar to that seen in the early noughties.
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The charts in this post have been created using Chartbook on Datastream. The Chartbook, created and maintained by Fathom Consulting, is a library of over 9000 charts, containing up-to-date macro and financial market data for over 170 countries. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. Simply type search ‘cbook’ into your Eikon search bar or click the ‘Chartbook’ tab on Datastream to find out more.
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