A weak set of finance data points to a deepening Chinese growth slowdown into 2019, highlighting the government’s challenge in getting loans to private companies and other cash-starved parts of the economy.
The data were released amid a debate within the bureaucracy about how best to encourage the banking system to overcome its reservations and lend more to the private sector. Despite forecasts for another lowering of the central bank’s reserve requirement ratio before year end, October’s measure of total social finance (TSF) — which is the bank’s broadest monthly measure of finance activity — suggests that pumping more funding into the financial system will not result in a radically different economic outcome.
Unless finance growth at least stabilises, economic growth will continue weakening. A relatively strong first half means that this year’s 6.5 per cent growth target will probably be met. The government will remain wedded to its annual growth target next year but may trim it back to 6 per cent. Even then,
Decelerating growth is to be expected as the Chinese economy matures. However, a lingering obsession with growth targets means the government may still be tempted to resort to its old stimulus playbook and abandon constraints on shadow finance and loosen restrictions on big city housing markets.
The current economic situation is not yet about President Donald Trump’s tariffs. Customs data and our own
Rather, the domestic economy is slowing mainly because of a clampdown on risky borrowing practices that the government sees as a threat to economic stability and, by extension, to its grip on power. In October, new TSF came in at just Rmb729bn ($105bn), the smallest monthly total in two years. The outstanding stock of TSF, which includes plain vanilla bank loans but also shadow finance channels such as trust lending, grew just 10.2 per cent year on year. Bank loan growth was stable at 13 per cent, roughly where it has been for the past two years, with the main drag again coming from a fall in shadow finance.
Some other key October indicators were better than conditions suggested by the People’s Bank of China (PBoC) report. Industrial output ticked higher while infrastructure investment rose 6.7 per cent after September’s 1.8 per cent drop, suggesting that efforts to encourage local governments to increase spending are having some impact.
On the other hand, real estate data were weaker, in line with our
Worse to come
Policymakers will continue trying to deliver support to more productive parts of the economy, most obviously the private sector. The reserve ratio has been lowered four times already this year and an unprecedented fifth cut could come before the end of December. Speculation is building about a cut in benchmark lending rates, which would be the first for three years.
The government is getting frantic as it tries to convince banks to lend more to private companies. Comments from the head of the banking watchdog about imposing lending quotas were quickly rowed back after bank shares slumped. Guo Shuqing’s comments pointed to government frustration about the unwillingness of banks to lend. As we have shown, private companies
The government will have to run bigger deficits next year if it wants to keep growth at or above 6 per cent. This will probably include more tax and fee cuts, while fiscal spending will become more aggressive to boost infrastructure investment.
As the tax take slows with the economy, the government will also have to abandon its fiercely protected fiscal deficit ceiling of 3 per cent of GDP, while looser monetary conditions will also add to pressure on the exchange rate. A weaker renminbi may help support exports, but it also leaves the central bank with the unpalatable choice of dealing with bigger outflows from the financial system or spending down foreign exchange reserves to defend the currency.
We expect the PBoC to
Reaching a deal with President Trump could at least avert the risk of more tariffs being placed on Chinese goods. A breakthrough would remove some of the uncertainty reflected in official data and our monthly surveys, helping to boost Chinese corporate and consumer sentiment. However, in the unlikely event that the two sides do strike a comprehensive deal, Chinese economic growth would still not spring back because of restrictions on finance and the housing market.
— He Wei, financial researcher, FT Confidential Research
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.