From a global macroeconomic perspective, we encourage readers to consider that the world is experiencing an extended, rolling process of deflating its credit excesses. It is now simply China’s turn.
For context, Japan started deflating their credit bubble in the early 1990s, and has now experienced more than 20 years of deflation and very little growth since. The US began its process in 2008, and after eight years has only recently been showing signs of sustainable recovery. The euro zone entered this process in 2011 and is still struggling six years onward. We believe China is now entering the early stages of this process.
Having said that, we believe that Chinese authorities have a viable plan for deflating their credit excess in an orderly fashion. Please stay posted as we will review this multi-pronged, market-based approach in our next column.
For now, let’s turn our attention to the size of the credit excess that China created and why we estimate it to be the largest in the world.
A credit excess is created by the speed and magnitude of credit that is created – if too much is created in too short a time period, excesses inevitably occur and non-performing loans (NPLs) emerge.
To illustrate the credit excess that has been created in China, let’s review several key indicators, including the: 1) flow of new credit; 2) stock of outstanding credit; 3) credit deviation ratio (i.e., excess credit); 4) incremental capital output ratio (efficiency of credit allocation).
The chart below shows the amount of credit created as a percentage of GDP during the five years prior to major downturns globally.
There are sign of a somewhat brighter global recovery and increasing global trade
Cannot yet have confidence that a sustained rise in inflation will materialize in a sustainable manner
Underlying inflation has not shown a convincing upward trend
You could say he’s cautiously optimistic.
Earlier in the year, the market read the optimism as a sign of potential action to tighten but officials have fought back against that idea, and that’s what helped to cap the euro at 1.09.
“As underlying inflation remains subdued and the path of inflation crucially dependent on the prevailing very favourable financing conditions, we cannot yet have sufficient confidence that a sustained adjustment in inflation will materialize in a durable manner,” he wrote.
It’s a similar line to what he said after the March 9 ECB meeting. The next ECB meeting is April 27.
China’s State Council on Wednesday approved 380 billion yuan ($55.1 billion) in tax relief that will mainly favor farmers and small businesses in a move that is seen as both economic and political.
The second large-scale tax cut to follow last year’s comes as China’s economy is forecast to slow down in the latter half of 2017, during which the Communist Party will convene its 19th National Congress and reshuffle top leadership.
China will modify its value-added tax this July by removing the 13% bracket while retaining the 6%, 11% and 17% tiers. The 13% rate currently applies to farm products and natural gas, but they will move to the 11% category. Farmers as well as households that purchase rice and vegetables will likely benefit from this change.
For smaller companies, those that pay 300,000 yuan or less in annual taxable revenue qualify for preferential tax treatment. The ceiling will be lifted to 500,000 yuan. Furthermore, small businesses and startups will be allowed to deduct 75% of research and development costs, up from 50%. These tax breaks will remain in effect until the end of 2019.
The Chinese government enacted about 500 billion yuan worth of corporate tax cuts in 2016. Helped also by a surge in infrastructure spending, the real economy grew 6.9% during the January-March period this year, marking the second quarter of economic acceleration. However, the People’s Bank of China, the country’s central bank, has been gradually raising market interest rates in order to rein in the real estate bubble.
With China’s gross domestic product widely pegged to maintain growth of 6.8 per cent in the first quarter of 2017, some official economists and state-backed think tanks are already predicting growth will slow markedly in the second quarter.
Zhang Baoliang, a researcher at the economic forecasting department of the State Information Center, was cited by the state-run Securities Times on Monday as predicting growth could slow in Q2 in the face of low external demand, a rising tide of “de-globalisation” and protectionism, uncertain policy outlook from the US, persistent economic imbalances in China and likely reduction in domestic sales of automobiles and housing.
The paper cited Mr Zhang and a number of other economists as predicting growth of 6.8 per cent in the first quarter.
But it also pointed to a forecast from the Institute of Finance and Economics at the influential Academy of Social Sciences that foresaw growth of slowing to 6.7 per cent in the first half of 2017, and which described full-year growth of 6.5 per cent as “no problem”.
More bluntly, Peking University’s Economic Policy Research Group has forecast GDP growth gradually slowing to 6.5 per cent over the next three quarters, bringing the annual rate to around 6.6 per cent.
At present a median estimate from economists compiled by Bloomberg predicts GDP growth for the first quarter will come in at 6.8 per cent year on year, with 16 of the 36 economists surveyed forecasting exactly that rate.
The Parliamentary standing committee on finance headed by Dr M. Veerappa Moily has sought an explanation from CSO over its GDP estimate for 2016-17 which it said is considered by experts “over-estimation” in view of demonetisation.
Central Statistics Office (CSO) in its advance estimate has pegged GDP growth for 2016-17 at 7.1 per cent and it kept unchanged while announcing Q3 growth figures.
Last month CSO had said that despite demonetisation, India’s GDP grew by 7 per cent between October to December 2016 (Q3 2016-17) to retain the title of the world’s fastest-growing major economy.
“The committee would also like to be apprised about the rationale/process/assumptions made and adopted by the CSO in their recent GDP advance estimates for 2016-17, which has been considered by independent experts as a possible over-estimation, particularly in the backdrop of demonetisation,” said the committee in its report submitted in the Parliament.
China’s top economic official trimmed its growth target and warned Sunday of dangers from global pressure for trade controls, as Beijing tries to build a consumer-driven economy and reduce reliance on exports and investment.
In a speech to the national legislature, Premier Li Keqiang Li promised more steps to cut surplus steel production that is straining trade relations with Washington and Europe. He pledged equal treatment for foreign companies, apparently responding to complaints Beijing is trying to squeeze them out of technology and other promising markets.
Li’s report set the growth target for the world’s second-largest economy at “around 6.5 percent or higher, if possible.” That’s down from 6.7 percent expansion last year but, if achieved, would be among the strongest globally, reflecting confidence that efforts to create new industries are gaining traction.
Li called for attention to the risks of China’s surging debt levels, which economists see as a rising threat to growth. He announced no major initiatives, but that was widely expected as the ruling Communist Party tries to avoid shocks ahead of a congress late this year at which President Xi Jinping is due to be given a second five-year term as leader. Analysts expect Chinese leaders to use the legislative meeting to emphasize reducing financial risks and keeping growth stable.
At a time of demands in the United States and Europe for trade controls, Li warned China faces “more complicated and graver situations” at home and abroad.
According to the document, the deficit-to-GDP ratio is expected to be at the level of 3 percent, while the registered urban unemployment rate will reach 4.5 percent.
The GDP growth in China is expected to amount to 6.5 percent or more in 2017, which has been the worst indicator in the past 26 years.
“The GDP will grow by about 6.5 percent but in practice we will try to achieve better results,” according to the report by China’s National Development and Reform Commission (NDRC), published before the opening of the National People’s Congress.
On Saturday, China’s National People’s Congress (NPC) announced that Beijing will increase by around 7 percent this year, as compared to last year’s $146 billion.
According to China’s National Statistics Bureau, the GDP growth declined to 6.7 percent in 2016 from 6.9 percent in 2015, which has been the worst results in the past 26 years.