Everyone is watching to see if China really can move away from being fuelled by credit to one that is more sustainable and driven by consumers.
UBS’s Tao Wang thinks the chart of China’s “rapid and volatile” non-loan credit growth is the most important chart on China. That’s because this one chart can answer three of the biggest questions behind the consensus 7.5% GDP growth forecast for 2014, writes Tao.
- Does China have the ability to curb shadow banking and excess credit growth?
- Will it be able to effectively control local government debt?
- Will a rise in money market rates lead to a credit crunch and slower economic growth?
Tao admits that their “credit impulse measure isn’t perfect” but that “it remains the best indicator available for tracking overall credit conditions in China’s economy.”
This chart shows overall credit has been declining. Tao expects “the government will pursue a slightly more prudent monetary policy and will better regulate the shadow credit market in 2014, slowing the pace of leverage but refraining from outright deleverage.”
Tao projects that overall credit will grow 15-16% this year and has a slightly above consensus GDP forecast of 7.8%.