The Global Economy Has China's Back as It Confronts Debt Demons

Updated on
  • Export data remained strong last month after bumper trade year
  • Credit slowed in December, signaling progess in debt campaign
The global environment still looks "very supportive" for Chinese exports, says JPMorgan Senior Economist Grace Ng.

China is now getting a little support from the global economy it helped to power in recent years.

Two major data points out of the world’s second-largest economy Friday underscored that China’s year of reckoning with debt and financial fragility poses hefty growth challenges. Handily, export demand from the rest of the world is continuing to keep the nation’s factories and ports whirring for now, as developed markets become more bullish about the outlook.

  • Exports rose 10.9 in December, capping a full-year expansion in outbound shipments of 10.8 percent
  • Credit growth slid and broad money slowed to a record low of 8.2 percent, emphasizing that success in de-risking the financial sector could come at an economic cost

China’s trade surplus with the U.S. widened last year, regardless of President Donald Trump’s complaints. Aided by a more stable yuan, China’s policy makers have talked up their intentions of grappling with the debt pile this year, and economists have already dialed back their forecasts. Analysts surveyed by Bloomberg now see an expansion of around 6.4 percent this year, after 6.8 percent in 2017.

China’s trade surplus with the U.S. continues to widen

"The overall global environment will continue to be very supportive in terms of global demand for a second consecutive year, and that’s going to support China’s exports sector," Grace Ng, a China economist at JPMorgan Chase & Co. in Hong Kong, said in a Bloomberg Television interview.

With a favorable wind at their back, China’s policy makers have started the new year with a volley of new regulations aimed at subduing the build-up of risk in the official banking sector and among shadow lenders.

Read the full details on 2017 full-year trade data here

Over the first few days of 2018, the nation’s top regulators announced rules governing banks’ involvement in entrusted lending, barred insurance firms from extending loans in the guise of equity investment and tightened supervision on leveraged bond trading.

Those rule changes follow a more sustained tightening sequence pursued by the People’s Bank of China, which raised the key rate it charges banks for liquidity three times last year.

Xi Jinping’s government has signaled that if growth does slow as a result of its multiple efforts to reform the economy, it’s O.K. with that.

Read Xi’s new thinking on China’s growth targets here

Yet Friday’s credit data flashed a warning signal over how hard it may become to calibrate that precisely, according to Tommy Xie, an economist at OCBC Bank in Singapore.

"On the bright side, it shows deleveraging is really biting, but on the downside, it poses a challenge for the PBOC to balance between cutting leverage and controlling damage to the economy," he said.

It also won’t be easy for officials to curb credit throughout the system, especially as demand for funds in property and for consumption remains strong. Shadow banking activities surged in December, while lenders’ local currency loans were cut in half.

Entrusted loans more than doubled to 60.2 billion yuan, while trust loans climbed 60 percent to 228.8 billion yuan. Bankers’ acceptances, short-term credit issued by a company with a bank’s guarantee, surged to 67.7 billion yuan from 1.5 billion yuan from a month earlier.

In short, it may be too soon to declare any substantive progress in the financial risk campaign, and equally premature to say that growth will significantly suffer. Indeed, JPMorgan and others are even upgrading their output forecasts for 2018.

“China’s credit growth ended 2017 on a weak note,” Bloomberg Economics analysts Tom Orlik and Fielding Chen wrote in a note. “That likely reflects a blip in a volatile monthly series, rather than a signal of a new stage in the deleveraging process. China’s policy makers have so far looked more to strong nominal growth rather than slower credit expansion as the key to stabilizing the leverage ratio.”

— With assistance by Jeff Black, Enda Curran, Kevin Hamlin, Yinan Zhao, Miao Han, and Tian Chen

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