Stimulus in China is not yet getting through as loan growth declines and money growth stalls, increasing the likelihood policy makers ease further, and driving a re-acceleration in global inflation.
Loan data from China released today superficially showed a “beat” on the month. But month-on-month data is noisy and seasonal, the clearest way to look at it is the percentage change of the 12-month sum. This way we can see the trend, which for total CNY loans is down.
It is loans to non-financial enterprises and government loans that is driving total loans lower. One bright spot is that household-loan growth is rising (but is still negative). China’s pandemic policies, which favored state-owned enterprises at the expense of the household sector, further widened imbalances in the economy.
The low-hanging fruit from export-led growth has been plucked, and mercantile-driven growth has had to be increasingly supplemented by debt to meet targets. Now China is reluctant to stimulate in too carefree a manner as they are increasingly concerned about financial stability. Thus the rise in household-loan growth is a positive sign, but it is not enough to arrest the overall anemic recovery in China.
A principal area of weakness is the property market. It’s a major source of wealth and saving for the household sector in an economy with few alternatives and a closed capital account (at least to most people). It will be difficult to rejuvenate the household sector – and therefore the economy overall – without a rehabilitation of the property market.
Yet despite a series of easing measures, such as aid for developers, with further measures said to be imminent, the property market remains quagmired.
Real-estate transaction growth continues to slide, while floor-space started is contracting at over 6% per year, near series lows.
Furthermore, real-estate debt, after recovering early this year, is falling again, and is on track to make new lows, with USD HY debt having lost almost three-quarters of its value.
China’s binding constraint is unemployment. If growth deteriorates to the point where unemployment begins to rise sharply (youth unemployment is already over 20%, due to the weaker services sector in the pandemic, and a skills mismatch, according to Goldman Sachs), it’s likely China will reach for the hard-liquor, and stimulate – both fiscally and monetarily – much more freely.
This is likely to fuel a re-acceleration in US and global inflation. We’re not there yet, but the more disappointing data we see, the closer we will be.
