- Business Insider interviewed the star China debt analyst Charlene Chu about the hottest debate in Chinese economics right now – whether the country’s slowdown is due to its trade war with the US or to structural factors.
- She came down on the latter side, saying if stimulus measures do work, they will take about a year to make a positive impact on the economy.
- Chu also explained a “five-second indicator” she said would tell us when the slowdown is over.
In even the best-case scenario, China’s economy will continue to slow precipitously until the first quarter of next year, the Autonomous Research analyst Charlene Chu told Business Insider in an interview.
“The trade stuff is dominating the headlines so people make that connection, but the reality is the tariffs aren’t hitting that much,” she said. “When we talk to companies on the ground in China they say the tariffs have had a small impact, partly because the move in currency has offset that.”
Chu instead attributes the slowdown to the Chinese government’s crackdown on shadow banking.
“The most important thing that drives growth in China is credit,” she said. “It’s an economy that lives on new funding, and last year that gas was down by about 40% … relative to 2017 by our numbers.”
And Chu’s numbers matter a great deal. Whether at Fitch Ratings, the New York Federal Reserve, or now at Autonomous Research, she has been the go-to China analyst for those at the highest levels of government and finance for almost two decades.
All of this is not to say that the trade war doesn’t matter. If the US were to increase its tariffs on Chinese goods to 25% – as it very well may if negotiators do not come to an agreement by March 1 – the tariffs would start to take a big bite out of China’s economy, she said.
But they would only worsen the pain policymakers inflicted on the economy when they clamped down on shadow banking in the fourth quarter of 2017. That decision took time to trickle through the Chinese economy, and finally it started appearing in data in the fourth quarter of last year – just when Chu said it would.
What can I do?
The headlines have been coming fast and furious. On Monday, a fresh batch of bad economic data was immediately followed by an announcement from China’s policymakers. They reiterated their commitment to stimulating the economy as much as possible and announced more tax cuts.
But, as Chu pointed out to Business Insider: “As we show total tax revenue in China is just CNY16 trillion or 17.5% of GDP. Even something aggressive like cutting all taxes by a fifth yields just CNY3.2 trillion.”
There’s also been talk of an auto stimulus (which China also did last year) and subsidies to buy home appliances such as washers and dryers. And of course there’s always aggressive fiscal stimulus, which Chu says policymakers don’t seem to be considering quite yet.
China is likely to hold its firepower until after trade talks are finished. There are a few reasons for this, according to Chu. For one, policymakers will need to know what they’re dealing with.
And for another, a deal with the United States may come with certain stipulations that limit what China can do. American negotiators will most likely insist that China keep its currency stable, for example, which would rule out any action that would weaken the yuan.
For China, a weaker currency could make exports more competitive (and annoy the Trump administration), but it could also lead to currency outflows, a problem that plagued China during its 2015-2016 slowdown. It started to rear its ugly head a bit again in December, when outflows reached $US26.2 billion, according to Citigroup.
Chu also believes policymakers will leave property – China’s largest, bubbliest sector – untouched. That’s why it has to return to big sectors like autos, even though demand may be weak.
“One of the thing that’s striking on the ground in general is that there’s weak sentiment in China,” Chu said. “We are usually facing this situation where foreign investors are more negative than the Chinese people. We’re in the opposite position at the moment. They’re worrying where their jobs are going and income are going over a three-year horizon. That’s one reason why we’re seeing weak consumption.”
2 ones are won
Not everyone in China has the same worries, though.
“When we break down the flow of credit, we see that the collapse has occurred in shadow credit,” Chu said. “Traditional credit, which is loans and bonds, never pulled back … and that goes to SOEs,” or state-owned entities.
China’s private companies are faring far worse than those owned by the government. Policymakers have targeted some stimulus at these companies, but private business owners haven’t been shy about complaining that these measures have not been enough as SOEs gobble up struggling private businesses.
“The difference in narratives coming out of the state sector and the private sector is very striking,” Chu said.
“If you were to go to China now and do meetings with SOEs – particularly those involved infrastructure – you would walk away from those meetings thinking, ‘What slowdown is there … Why is anyone talking about there being a problem?'”
Everyone else in China will be waiting for a turnaround in credit conditions, which – if it does come in a few quarters – you will be able to see in deposit data, according to Chu. Deposits of M1 – the most liquid money supply, which includes physical currency and coin, demand deposits, travellers checks, and other checkable deposits – increased by an all-time low of 1.5% in November.
According to Chu, “a good ‘five-second indicator’ of whether everything the authorities are doing to ease policy and stimulate credit is working is corporate deposits because every one RMB in credit shows up as a new deposit in a company’s bank account.”
Until you see that, feel free to join the worriers.
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