Beijing (CEBR, Douglas McWilliams) – Six months ago, we highlighted the uncertain state of the Chinese economy as one of the key determinants of whether the world economy will enter a recession in 2020-21. As I am currently in Beijing to launch the Cebr report on the Belt and Road Initiative (and for the start of the Peking to Paris Endurance rally) it seems sensible to provide an update on how the Chinese recovery is developing.
The official data shows GDP growth continuing at a 6% plus rate (allegedly 6.4% in Q1). On the ground it looks a bit different. Imports from key trading partners like Korea, Japan, Australia and Singapore have fallen since mid-2018 and show little evidence of revival. Beijing property prices are officially down by over 10% from their peak two years ago. Monetary growth has slowed and has only shown slight signs of recovering.
But on the other hand policy has moved sharply into fast forward mode. Small business taxes have been cut by $29 billion. The income tax threshold has been raised from $6,300 to $9,000. And last month VAT for manufactures was cut from 16% to 13%. Special bonds worth RMB $300 billion will be issued to boost infrastructure. Meanwhile a range of monetary stimulus measures have been introduced. Adding the fiscal and monetary boost (which is pears and apples and not really a legitimate procedure) gives a grand total of 11% of GDP stimulus in the past 6 months. This is almost certainly a world record.
And yet, while the economy looks robust at one level, fears of the economic impact of the trade war with the US dominate the press. China’s second biggest property developer Evergrande (with debts of $99 billion) has been forced to issue debt at 11% to mature in 2020 on the back of a promise for a fire sale of property. Since property is China’s main asset class, sharp falls in property prices would be destabilising.
For many years, Cebr has followed the Chinese transport and electricity data to cross check the GDP information. The latest electricity data was issued three days ago accompanied by a glossy press notice saying that the (slight) recovery in electricity production showed that GDP was recovering. Chinese data is slightly subject to Goodhart’s law that once the authorities start using an item of data its relationship with other variables is likely to be affected.
No one has ever got rich betting against the Chinese Government’s ability to manage the economy. The authorities are both skilled and determined and they have rather more levers to pull than Western governments in similar situations might have.
And the latest monetary data hints at an acceleration. But it is far too soon to tell if these early signs will turn into a full blown recovery.
My best guess is that there will be a recovery, even if it is rather less buoyant than one might normally expect given the scale of fiscal and monetary action.
The rest of the world will be watching Chinese indicators closely over the coming months to check that this is really happening. And fiscal and monetary authorities will be keeping their fingers crossed.