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China has loosened up on its economy in several ways. And that tilt toward capitalism has paid dividends.
But it’s still a communist country with a centrally planned economy. The government is always tinkering with ways to manage the pace of growth and growth expectations. And it does this because policy makers have crafted a system of financial repression that doesn’t serve the commoner well. (Note: China is not a lone financial repressor, but it is among the most conspicuous.)
Their perceptions-management campaign, as I call it, is geared toward two major items:
- Rebalancing the economy toward a greater share of consumption.
- Proving the country doesn’t have a debt problem.
Concerning the latter, because investment compensated for the drop-off of China’s main growth driver — exports — after the 2008 financial crisis, the country has been left with a credit overhang and looming bubbles. The central government has acknowledged the need to rein in excesses so as not to jeopardize growth should a bubble pop. But a shadow-banking system is fully operational in China. And that threatens to build on excesses that make its economy vulnerable.
Last week we were reminded that the broadest measure of credit — aggregate financing — dropped for a fourth straight month in July. And that fit with the leaders’ decision to tighten up on credit growth.
But today we learn … all that has changed. In August, aggregate financing nearly doubled. Let me cite a Bloomberg article to make my point:
“If credit growth picks up persistently from here, China’s current growth recovery may well last a bit longer and go a bit further,” said Yao Wei, China economist at Societe Generale in Hong Kong. “However, that only adds to the downside risk afterwards, as the leverage of Chinese corporates and local governments keeps rising from the already alarmingly high level.”
As I noted in my Facebook post on Monday, recent Chinese economic reports have helped to bolster investor sentiment. This credit number is likely to validate those shifting expectations for now. But down the road, perhaps before the year is over, the debt dilemma will again spark a shift in Chinese growth expectations.
Best wishes,
JR
