Panda in the room
Much of investors’ attention has lately been focused on western central banks and their communications about tapering and tightening. The role of the country that has been responsible for the bulk of global economic growth over the past decade in triggering the next global recession, which Fidelity expects to occur “in the next 12-18 months”, has largely been overlooked.
When the US sneezes, the rest of the world catches a cold. But this saying now applies perhaps even more to China, which has been suspiciously high credit growth since the global financial crisis.
“No matter how one looks at it, credit growth in China is far too high versus nominal growth,” write Robeco’s Bus and Verkerk.
“Chinese policy makers are pressing the debt creation button too often. The economic growth trend is getting lower and is interrupted by short mini cycles. In these mini cycles – the last example was in 2015 – policy makers panic when growth becomes too low, and press that button again. Credit growth, driven by state-owned banks providing credit to state-owned corporates, is unbalanced, goes towards unproductive parts of the economy and has reached dangerous levels”.
“The chance of China entering a serious growth slowdown somewhere in the next years is almost certain. A key indicator to watch will be Western exports to China,” they conclude.