Eastern Peril Still Biding Its Time

09/09/2016 at 4:57 pm

At this time last year, markets were preoccupied by the bear case on China. The stock market had collapsed, the yuan was devalued and the country stood supposedly on the brink of a major banking crisis brought on by bad lending and vanishing growth. So appalling were the consequences of such a crisis that the Fed explicitly linked US monetary policy to the wild ride offered by the Shanghai Stock Exchange.

What a difference a year makes! There is the occasional susurration over the Chinese Peril discernible by those who listen intently, but panic on the subject, having waxed to hysteria last summer, has since waned to nothing.

At the same time, Chinese data has continued to be published as before. So what has it been telling us? Are we being complacent to ignore a threat which only twelve months ago was thought to imperil the world? Or was it all nonsense?

A year ago this blog took something of a sceptical stance on the Chinese Peril. On the subject of devaluation in particular we said that “exports matter to the Chinese economy, devaluation ought to help exporters, and monetary softening elsewhere ought to ease some of the pain in the property market and contribute to lending growth.”

Lo and behold, those macroeconomics textbooks turn out not to be a waste of shelf space after all. Trade figures out from China yesterday showed the pace of decline continuing to slow; both export and import numbers exceeded forecasters’ expectations. It is instructive too that the latest bout of renminbi weakness has passed without much comment: the yuan is just under 3% weaker against the dollar for the year to date, almost matching the pace of its decline last year when it made for headline news. (Just as importantly it is also 6% weaker against the euro and 21% weaker against the yen.) So far there is no sign of this translating into higher prices: CPI inflation was +1.3% on the year to August, towards the bottom of its recent range and well below the levels of 5-6% which provoked a policy response in 2010-11.

Further evidence of economic woe last year came from output indexes. It was seen as more surprising than it should have been at the time that a sharp strengthening of the currency had hurt manufacturing. Similarly, when last week’s manufacturing PMI number came out at 50.4 for August – not earth-shattering, but the highest level for two years – it not only beat expectations but fell outside the entire forecast range.

Another area of concern was the property market. Signs of weakness last year were misinterpreted as a dangerous, balance-sheet-threatening bubble collapse. Yet the market has since steadied following its correction and some cities are imposing ownership curbs in an effort to curb precisely the kind of overextension which so many observers thought they had noticed twelve months ago. As to balance sheets, figures out last month showed that the bad loan ratio for the Chinese commercial banking system actually stabilized in the second quarter at 1.75%. (That’s still a large figure in dollar terms – $215bn – but then China has fifteen times that amount in sovereign reserves.)

Looking at some other indicators, retail sales growth has remained steady at levels of +10% on the year and more throughout 2016, and July’s passenger car sales figure (+26.5% on the year) was the highest posted for three and a half years. On the industrial side of things, electricity consumption came in at +8.2% on the year to July, up from -0.2% back in December and the highest print since February 2014; headline industrial production itself seems to have bottomed out last year and has turned out at +6% and better for 2016 so far.

None of this is to say that China does not have her economic issues, like every other country. Here one might think of SOE inefficiency, frustrations to some monetary transmission mechanisms, over-reliance on particular sources of growth, grim demographics and developing world problems such as questionable building standards and the frictional effects of political corruption. But if we are to find the source of the next global catastrophe it seems we must look elsewhere. The Chinese Peril, if such a thing really exists at all, is still biding its time.

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