China Hits A Soft Patch, Brexit: The End Of The Beginning, Figuring Out Financial Conditions

  • China Hits A Soft Patch
  • Brexit: The End Of The Beginning
  • Figuring Out Financial Conditions
  • “What goes up must come down,” is an idiom dating to the 1800s describing the inevitability of gravity. It is also a fundamental concept in finance; anything elevated artificially without fundamental support will eventually lose altitude.

    Economies have a tendency to correct imbalances and return to equilibriums in the longer run, irrespective of the short-term measures introduced to overcome those forces. The Chinese economy may currently be living this lesson. China has enjoyed over three decades of soaring growth thanks to the tailwinds of expanding global trade and the helium from government-financed investments.

    But recent signs suggest that China is struggling to sustain economic momentum, and risks of a hard landing are rising. If China falls back to earth, we will all feel the tremor.

    The slowing of the Chinese economy is apparent across a broad range of indicators. Quarterly growth in real gross domestic product (GDP) fell below a 6% annual pace for the first time since the financial crisis. The manufacturing Purchasing Managers’ Index fell below 50 in December, registering a first contraction in nearly two years. (Export orders, in particular, were very weak.) Given Western suspicions about the manufacture of Chinese economic data, the situation could be worse than the numbers suggest.

    Chinese households, whose incomes have expanded considerably over the last decade, are holding off their spending amid rising uncertainties. Retail sales, which have grown at a double-digit pace consistently since 2008, recently recorded their lowest growth rate in over 15 years. Auto sales declined for the fifth straight month in November and now stand 14% below where they were a year ago. Chinese consumers are struggling to pay off their credit cards, with delinquencies up 33% year-over-year.

    Reflecting all of this, the Chinese equity markets performed very poorly last year, in both absolute and relative terms.

    There are those in Washington who will claim these developments are the product of trade restrictions, but there is much more at play. Two years ago, the Chinese government began a drive to scale back leveraging. Wealth management products (WMPs), opaque financial instruments used to finance housing and small businesses, were a particular target. Year-over-year growth in the issuance of WMPs fell from more than 50% at the end of 2015 to zero at the end of 2017.