Here’s why global reflation trade may survive China’s credit slowdown
Could a tightening of China’s loan taps end reflationary global trading in global stock markets this year as the global economy recovers from the coronavirus pandemic?
While previous slowdowns in Chinese lending have triggered market volatility, some argue this time will be different, as U.S. budget largesse could replace China as the engine of global growth for the first time in two decades.
The International Monetary Fund predicted this in its latest forecast, estimating that the US economy is expected to grow 6.4% in 2021.
In recent months, investors have worried that China’s efforts to iron out excesses and stabilize its financial system could hamper the global recovery.
The ‘credit boost’, which tracks loan growth as a percentage of GDP, has fallen below zero in recent months, after Beijing officials sought to curb lending to prevent any destabilizing excess that could overheat the economy. Chinese.
“You see a lot of interesting sound clips among policymakers in China,” said Michael Arno, associate portfolio manager at Brandywine Global. “Discussions continue on the leverage effect of the real estate market. These are all signs that this is very coordinated in my opinion.
Growth in the stock of total social finance (TAF), a general measure of credit in the economy, slowed to 12.3% in March, from 13.3% in February.
Arno says the credit boost has historically tracked iron ore and copper prices, as well as gauges of global manufacturing activity. However, recent supply shortages and the adoption of electric cars have helped offset the decline in loan growth.
But fiscal stimulus packages by Western policymakers, led by the United States, could offset the impact of declining credit in China.
“China’s credit impulse started to recede earlier in 2020, and the rest of the major economies have now joined. This would normally be a worrying sign, but we don’t believe it is now, ”said Tamara Basic Vasiljev, senior economist at Oxford Economics.
She noted that direct payments to households and businesses by the US government stimulate savings in the private sector, “making credit less needed,” Vasiljev said.
Yet many investors fear that the sharp decline in credit growth in the commodity-hungry Chinese economy could hamper global trade and manufacturing, even if the wider damage to the performance of risky assets was more difficult. to be determined.
“By how you measure it, China is the world’s largest economy and the biggest trading partner of most emerging markets. What happens in China is very important for other emerging markets, ”said David Loevinger, analyst at TCW Group.
See: Investors fear global markets are vulnerable to China’s credit crunch
Friday was a prime example of investor sensitivity to any sign of slowing growth in China.
After China’s official purchasing managers’ index fell to 51.1 in April from 51.9 in March, global stocks fell.
China CSI 300 Index 000300,
closed 0.8% lower on Friday and the European benchmark Stoxx Europe 600 fell 0.3%. In the United States, the S&P 500 SPX,
traded lower at the end of the week, albeit after closing at a record Thursday.