Being caught in the cross-hairs of a $400 billion trade bazooka with the world’s biggest economy’s finger on the trigger is not a comfortable place to be, but it is probably not China’s biggest concern right now.
The bigger worry is its economy slowing more quickly than expected at the same time Chinese authorities are trying to remove mountains of debt built in the financial system.
If it is a problem for China’s economy, it is a problem for the global economy in general and Australia’s economy in particular.
A batch of figures released late last week highlights the concerns.
Lending data has been weak for a couple of months now, with measures of growth in total social financing and money supply hitting historic lows in June.
Trade figures, while reporting a record surplus with the US, pointed to declining domestic demand with a sharper than expected contraction in imports.
The point about falling credit growth is it’s often an indicator of a broader economic slowdown in the future.
In China’s case, that tends to be around six months around before the impact is seen.
As Financial Times’ commentator John Authers wrote recently, while it is popular to blame the markets’ recent wobbles on the tariff drama, internal developments in China need greater scrutiny.
“China’s monetary policy is designed to rein in the excessive credit that followed the global financial crisis,” Mr Authers said.
“That in the process threatens to rein in Chinese economic growth, along with the growth prospects of the halo of economies and industrial sectors that depend on China. The price of copper, for example, has tumbled 17 per cent in the past month.”
By extension, China’s domestic policy to slowdown growth, flows through global growth and particularly to its suppliers, such as Australia.
There was a warning in last week’s trade figures for Australia with iron ore imports tumbling 12 percent and LNG shipments down as well.
Why does China even bother producing GDP numbers that few economists see as credible, asks Stephen Letts.
For what it is worth, the consensus forecast is another step down in annualized growth to 6.7 percent.
Chinese GDP figures are of questionable benefit at the best of times, and in this instance, they are unlikely to pick up the recent deteriorating conditions.
The big monthly data dump accompanying the GDP release is likely to be far more instructive.
Fixed asset investment — a proxy for infrastructure and construction spending — has pointed to a sharp slowdown in spending in recent months. June’s data is unlikely to break that trend.
Industrial production, a measure of the pulse in China’s factories, is likely to be weaker too.
But the question remains whether policy makers can engineer a “soft” landing without adding to debt, now somewhere around 250 per cent of GDP.
It is not just China’s central bankers who are worried about debt, it is near the near the top of Reserve Bank governor Philip Lowe’s list of anxieties as well.
“Among the largest economic risks that Australia faces is something going wrong in China,” Dr. Lowe told and Australian-Chinese business gathering in May.
“Perhaps the single biggest risk to the Chinese economy at the moment lies in the financial sector and the big run-up in debt there over the past decade.
“It is too early to tell whether the authorities will be successful in managing the transition from a growth model heavily dependent upon the accumulation of debt to one where credit is less central.”
Investment growth at just above 6 percent is at its lowest level in more than 20 years.
That figure is inflated by sky-rocketing land prices as developers slug it out for patches of dirt.
Investment in land in the first five months of the year has risen by 70 per cent, while the spending on construction has fallen. Something is badly out of kilter there.
That land-price bubble of course has been funded by debt.
Rising dwelling price rises have stalled.
If they start falling, then loan defaults mount up putting the entire financial system under stress.
Just the sort of thing Dr. Lowe warned could go wrong.
The current preferred tools center on lowering lending rates, affecting the cost of borrowing, not the amount lent.
But debt is still debt, and bad loans are bad loans.
As Dr. Lowe noted in his speech, “serious accidents along the way” can happen in trying to manage the transition away from a growth model so heavily dependent on credit.
So far, a modest efforts to push interest rates lower appear to have had little effect in stabilizing credit growth and a more aggressive policy may be on the way.
As Capital Economics Mark Williams noted, the recent weak credit data has “catalyzed the deterioration in sentiment about China’s economy”.
“Given the headwinds that firms are now facing — reflected in a rise in bond defaults —cuts to benchmark rates are likely soon,” Mr. Williams said.
“Banks were this week reportedly instructed to cut lending rates for small firms significantly.”
And that is even before the impact of the harsh U.S. tariff regime is felt.
For now, it is a very delicate balancing act.
Easing the reins on debt may soften the landing, but it also raises the stakes on a harder landing further down the track.
The U.S. Federal Reserve put out a report reinforcing its view on the economy there was in solid shape, that nudged up the US dollar and the price of US treasuries.
The rhetoric on the trade war eased somewhat as well, with US Treasury Secretary Steven Mnuchin hinting the United States and China might reopen trade talks.
The ASX maintained it contrarian run last week falling 1 percent while global markets, including the beaten-up Shanghai exchange, made solid gains.
The consensus bet is another 15,000 or so jobs will have been added in June and that won’t be enough to drive down the unemployment rate from 5.4 percent.
May’s result — 12,000 new jobs, but hours worked falling — was considered a bit weak.
The fall in unemployment was largely as a result in a drop in the participation rate, or number of people looking for work.
A significant fall in unemployment is still needed to get wages growth moving.
As well the ACCC is expected to hand down its decision on Transurban’s bid for the $17 billion Westconnex project in Sydney.
The ACCC raised concerns about the toll road giant’s involvement in the project given it already controls seven of Sydney’s nine toll roads, and 15 of 19 across Australia.
The regulator has yet to block any of Transurban’s expansions, but the language it used in raising concerns this time indicates it mightn’t just be waved through on Westconnex.