Chart of the Week: China continues to repeat past mistakes

Based on the official GDP data, 2017 is on track to be China’s first year in which growth has accelerated since 2010. Fathom’s own China Momentum Indicator (or CMI) 2.0, would lead one to reach the same conclusion. Nevertheless, it paints a very different picture of the past few years, with growth slowing dramatically through 2014 and 2015, before rebounding in 2016 and continuing to strengthen this year.

We disagree with the government’s view that “China’s growth has shifted from a high-speed growth phase to a high-quality growth phase”. Rather the pick-up has been the consequence of a surge in credit-fuelled investment, somewhat reminiscent of Beijing’s response to the global financial crisis in 2008/09. Tough words at the start of the year regarding what was seen as excessive and risky lending were not backed up by actions. Consequently, we have seen a significant increase in less-regulated, off-balance sheet lending.

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As we have highlighted many times before, we do not have confidence in the sustainability of this growth path for China as it only adds to its long-run problems. Our central scenario for the long term, relating to the period between 2020 and 2025, is for growth of around 4.5%. The latest CMI 2.0 reading of 7.6% in the four quarters to September suggests that we may be close to a turning point. Unchanged from the revised figure for August, this marked the first time in almost two years that the pace of growth held steady, as opposed to firming.

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