This is exactly the pattern that the Chinese leadership had been hoping to exit in recent years. The pandemic forced them to go back to the old and rather crude playbook of growth based on building real estate — a policy that raises concerns about over-extended credit. Consumer activity still hasn’t recovered. Meanwhile, export data show that China has been helped very much by trends in the West. As Societe Generale SA demonstrates, Chinese companies are doing great business exporting products necessary for working from home:
Another way to illustrate the twin-track recovery comes from TS Lombard, which compares growth in industrial production and retail sales. China’s ability to turn on the tap and increase manufacturing output when it wants to appears to be intact; its ability to prod consumers into buying is much more limited:
What does all this mean for the future of Chinese economic policy, and for the rest of us? Following the good news that one of the world’s largest economies was able to deal with the pandemic better than most and revive itself swiftly, it now seems reasonable to get ready for worse news ahead. The TS Lombard prediction is that we should brace for a deceleration, as China once more tries to rein in credit before it creates a crisis, and attempts to spread the benefits of growth to the consumer:
The trifecta-powered classic China growth drivers — industrial production, net exports and investment — have all outperformed even as consumption has lagged. This lopsided growth dynamic is set to continue In H1/21, before narrowing in H2/21 as consumption recovers slowly and traditional economic drivers decelerate on tightening policy support. Steady growth delivered while providing minimal stimulus and simultaneously restarting China’s de-risking drive is positive for long-term sustainability but will provide little support for global activity or commodity prices.
In other words, the biggest support from China for the rest of the world may already be behind us. Many Chinese economic measures show a slight slowing in the final month of the year. Perhaps most significantly, this showed up in imports of industrial commodities, as shown once more by SocGen:
The monetary policy signals could be more important. Having successfully revived economic activity, the professed aim of the People’s Bank of China is now to maintain “stable leverage.” This may well make sense given the signs of excess in lending; a China concerned with macro-prudential regulation and crisis avoidance is very much in the interests of the rest of the world. The phrase “stable leverage” was last used, according to TS Lombard, during China’s big attempt to de-leverage the shadow-banking sector in 2017-18. It seems reasonable to infer that China will now attempt to rein in local government debt and the more excessive behavior by property developers.
This is good news for the long term, given that the rest of the world has lived in fear of a Chinese “Lehman Moment” for the last decade. It isn’t the greatest news for risk assets in the short term, as China has recently been contributing to the liquidity gushing through the world.
Pennies From Heaven
Having said that, there is no denying that there is some extremely frothy behavior at the fringe. Whether or not this proves to have contaminated the entire market, it is an alarming development and means that some people somewhere are going to get hurt. The likelihood, as usual on these occasions, is that they will be relatively inexperienced investors losing money that they cannot afford to lose.
Are U.S. stocks really in a bubble? The question continues to reverberate, and I have received at least half a dozen pieces of research headlined with some version of that question in the last couple of weeks. There are sensible arguments that the historically strange conditions in the bond market, and the likely rebound from the economic slump caused by the pandemic mean that stocks aren’t as expensive as they appear. There are also decent arguments that the market’s froth is no more than peripheral, and therefore not a great cause of concern.