The limits of stimulus
The GDP figures “do not paint a bright picture” of the Middle Kingdom’s economy, says Andrew Batson of Gavekal Research. What’s more, recent economic indicators offer “few signs that the slowdown of recent months has ended”. Take the automotive sector: vehicle sales are down by more than 10% so far this year. With total debt topping 300% of GDP, Chinese authorities are unwilling to turn on the credit taps. While targeted help and tax cuts should cause the current downturn to bottom out soon, a “strong rebound” is unlikely.
China’s headline growth numbers are “heavily massaged”, says Nathaniel Taplin for The Wall Street Journal. Many economists think that the real figures are much lower. Yet this disappointing data still reflects “genuine weakness”. Authorities will also be aware that with local food and accommodation prices surging any overeager stimulus risks unleashing an inflationary shock. Although trade tensions with Washington have eased in recent weeks we are still a long way from a deal that rolls back US tariffs that have already been announced on $550bn-worth of Chinese goods. “All that makes a pretty shaky foundation for 2020.”
China’s slowdown will do nothing to help a lethargic global economy. The International Monetary Fund recently cut its 2019 global growth forecast to 3%, the slowest pace since the financial crisis. The organisation’s Global Financial Stability report pointed out that years of quantitative easing and zero interest rates have “created a monster”, says Ambrose Evans-Pritchard in The Daily Telegraph. The world’s financial system is badly stretched and China is in a “class of its own”. Even a one-party state cannot decree an end to the “slow rot of bad debt”. Weaker growth in China may actually be good news, says Gwynn Guilford in Quartz. Past expansions have been driven by unsustainable infrastructure splurges, which only added to the debt mountain. The latest figures suggest that policymakers are “holding the line” as they try to “de-risk” the economy and clamp down on shadow banking. In the long-term that can only be a good thing for the global economy.
This year has been “peppered with nasty surprises for investors”, says Michael Mackenzie in the Financial Times. Defensive portfolios are all the rage among asset managers. Yet with sentiment so gloomy, even mildly positive news on US-China trade could spark a surprise year-end case of “deal euphoria” in markets. Investors should stay tuned.