China’s economy is not in a good place, and a chart just published by Oxford Economics puts that in perfect perspective.
China’s broad money growth — which includes physical currency, some sorts of deposits in banks and some sorts of very liquid securities — has now slowed to the point that it’s actually slower than the United States’. Money supply growth is definitely not perfect, but it’s a rough measure of economic activity in the medium term, so an acceleration in the US would generally be a good signal, and the slump in China is a very bad thing.
Here’s how it looks:
It’s a pretty amazing occurrence. It’s happened just three other times since 1986, and “all three episodes were parts of signals of an eventual acceleration in US GDP growth and a slowdown in Chinese activity.”
China is aiming for 7% GDP growth, which is the slowest in nearly a quarter of a century, but even that might now be too optimistic. Here’s Oxford Economics:
The weaker Chinese numbers are certainly not consistent with ‘around 7%’ output growth in the medium term. Rather, the weaker M2 (money supply) growth, if sustained, supports our forecast of Chinese medium-term growth slowing to around 5.5% or possibly even lower. It is difficult to see how this would happen without the Chinese monetary authorities attempting to turn the trend by easing monetary policy.
They add that China’s M2 (a broad money measure) has risen about 2.5 percentage points faster than nominal GDP (which includes inflation) since 2010, so growth of 7% would suggest growth of about 4.5% nominal growth, even lower once inflation is stripped out.
Even the eurozone, a pretty reliable symbol of stagnation over recent years, may surpass China in the months ahead. With slow growth, China is going to find its debt mountain much more difficult to handle.
What’s more, the boost the country has been getting from relatively good demographics is pretty much at an end now, and the country is going to have fewer workers and an accelerating number of retirees to support for the foreseeable future.