Does China know something the rest of the world doesnt?
Sporadic outbreaks of the coronavirus, including the nasty Delta strain  Chinas major export hub, Guandong province, was hit by an outbreak last month  have added to the opacity of the authorities motivations. The bad debts that have hit the big end of Chinas property development sector hard may be impacting its banks where, after being urged to lend more last year to counter the effects of the pandemic, their willingness or ability to extend credit, particularly to small and medium-sized businesses, appears to have been reduced significantly this year. For the rest of the world, an earlier and faster slowdown in Chinas growth rate than expected provides an ominous warning of what might be to come. The additional liquidity and capital unlocked by the change to the reserve requirements could reflect an awareness that the crackdown on leverage might be having some unintended consequences. It might also be a recognition that the economy is slowing faster than the authorities anticipated. Recent manufacturing and service industry indicators are pointing to a sharp slowdown in activity amid weaker domestic consumption, higher input costs, the recovery in most developed economies, the continuation of the US trade and financial sanctions and an expanding rift between China and the West. Loading Only weeks ago Chinas authorities were so concerned about the soaring cost of industrial inputs on their industries profitability that they called in the senior executives in the metals industry to warn them of punishment for excessive speculation while also threatening traders in derivatives markets. Thats had some limited effects (although the iron ore price remains elevated) but factory gate prices still rose nearly nine per cent last month. That was down only marginally on May, when the surge in commodity prices was generating the fastest growth in prices in more than a decade, undermining the profitability of manufacturers and/or their competitiveness and generating inflationary pressures. Apart from the spikes in commodity prices the economy, like economies elsewhere, has been hit by supply chain disruptions and the shortage of semi-conductors being experienced globally. That has particularly hurt Chinas auto industry, a key sector of its domestic economy. China has traditionally used the reserve requirements as one of its first lines of defence against an economic downturn  it dials them up and down far more frequently than occurs in most other major economies  but the current move looks more like fine-tuning and insurance at this point than large-scale stimulus. China might be more worried about its economy than it appears. Credit:Bloomberg Its economy is still expected to post growth of more than 8 per cent for the full calendar year thanks to the turbo-charged first quarter before sliding back to six per cent, or something a little lower, in 2022. For the rest of the world, an earlier and faster slowdown in Chinas growth rate than expected provides an ominous warning of what might be to come. China was impacted earlier than the rest of the world by COVID-19 but also emerged from the worst of the economic impacts first. The outbreaks of the virus this year and the emergence of the Delta strain are consistent with what is happening in the rest of the world, which has also been rebounding  later and at lower rates than China  from their economic nadirs a year ago. The V in those recoveries may, if Chinas experience is a guide, may be shallower and more volatile than currently anticipated even though most of the western economies injected far more stimulus into their economies than China. Given that that stimulus was funded with debt  and most of those economies went into the pandemic with government balance sheets still over-burdened with the legacy of the 2008 financials crisis  a premature economic slowdown amid fresh outbreaks of the more virulent mutations of the virus could be quite threatening. As it stands, China has taken the first step towards a more expansive monetary policy (albeit not yet more expansive fiscal policy) even as the central bankers in the other major economies are discussing when and how to start unwinding the monetary stimulus they flooded their economies with last year.