Even though the Chinese economy seemed to have been gaining momentum again (which seems to be confirmed when looking at the chart of the country’s main stock index, see the next image), more questions are arising about how long the country can keep up this pace.
Even though the Purchase Manager index has been improving as well, and despite the fact the total consumption of electricity and the total steel output are indeed confirming the Chinese economy seems to be improving again, Danske Bank thinks the current uptick might be short-lived. In a publicly available research report titled ‘Recovery set to lose steam in 2017’, the bank argues the improvement we’re currently seeing was predominantly caused by 1) stronger home sales, 2) fiscal stimulus from the central government targeting investments in infrastructure and more importantly 3) an uptick in the export results predominantly due to the weaker Yuan.
Source: Danske Bank
We agree with this assessment, and especially with the fact the weak Yuan has helped the country to boost its export results which ultimately will definitely benefit the China’s GDP results. Even though the currently expected growth rate of 6-7% is definitely something most countries can only dream of, a mid-single digit percentage increase of its GDP is a weak result for China if you compare it with the growth rates in the past decade.
The growth rate indeed has been less than 8% since 2012, and it does look like the Chinese government is trying to prepare the country for a soft landing as the annual growth rate of the GDP continues to decrease. It does look like the country would like to save face and will do whatever it takes to keep the growth rate at 7%, but this very likely won’t be feasible without any additional stimulus measures, and it’s interesting to see Danske bank is sharing our opinion.
As we explained in a previous article about the copper market, China is the most important (read: largest) consumer of copper in the world, and it actually is in the world’s best interest to make sure the country’s policies are making sure China doesn’t encounter any sudden and unexpected economic shocks.
Theoretically, a country has two possibilities to ensure a smooth sailing on the economic waters, and that’s either by changing the monetary policy of the fiscal policy. The problem with China is that a loose monetary policy might not be the best solution here, considering the country had to deal with some severe bubbles, as everybody probably remembers the phenomenon of ghost cities as there was way too much credit available on the markets. The lack of monetary expansion is now allowing the real estate market to cool down again, as you can see on the next image.
A monetary policy might not be the best way to tackle a crisis, as it would just be kicking the can further down the road as making it easier to obtain credit will just lead to new bubbles in the future. And that’s the main problem China is facing, as there’s only one real possibility to give the economy additional oxygen, and that’s by implementing new fiscal structures, and increasing the budget deficit to have more cash available to subsidize or just outright build new infrastructure.
Perhaps the biggest risk of the domestic economy is the continuously slower growth of the real household income. Whereas the average growth rate of the household income was approximately 14% right after the Global Financial crisis but has now fallen by almost 75% to just 4%.
Source: Danske Bank
That’s still a very acceptable result, but it’s definitely not as good as the Chinese might have gotten used to, and the trend is very clear.
Long story short, China is ‘okay’ for now, but as the pressure on its economy will very likely remain stable, we would expect the Chinese central government to introduce new economic and fiscal policies before next summer to avoid missing its longer term growth target.