It is hardly a secret that thanks to nearly $4 trillion (at least) in credit creation in 2017 - more than the rest of the developed world combined - China has been the proverbial (and debt-funded) "growth" dynamo behind the recent period of "coordinated global growth." Unfortunately, much if not all of this was window dressing for the just concluded 19th Communist Party Congress, which in not so many words, made Xi Jinping into a de facto emperor with no apparent or otherwise heirs.
The problem is that with the Congress now over, so is the period of coordinated global growth. Here's why.
As Citi writes, "China’s Party Congress has concluded and Xi Jinping’s position as President has been consolidated. Given there are no standing committee members in their 50s, it suggests there are no apparent heirs for Mr. Xi, opening the door for him to stay on beyond 2022. One of the key questions in the run up to the congress was that once power was consolidated, would China accelerate its economic reforms. We think this is unlikely but do expect a moderation of growth, with data momentum perhaps set to continue to slow at its current pace. Note how China’s MCI tends to lead Citi’s macro data index for China and our MCI is still tightening."
It gets worse.
As Capital Economics writes in its China Activity Monitor note this week, the firm's China Activity Proxy (CAP) suggests that growth in China slowed last month to the weakest pace in a year and with property sales cooling and officials continuing their efforts to rein in financial risks, Cap Econ thinks that looking ahead "the economy will slow further over the coming quarters."
Some more details from CapEco:
The CAP is our attempt to track the pace of growth in China without relying on the official GDP figures. It is based on a set of low-profile indicators chosen to reflect activity across a wide section of the economy.
- The CAP suggests that, following a sharp rebound in 2016, the economy expanded at a pace not far short of that shown on the official GDP data in the last three quarters. On a monthly basis though, we estimate growth actually peaked in July at 6.6% y/y before slowing to 5.6% last month, the weakest pace in a year. Growth also edged down last month in seasonally adjusted 3m/3m annualised terms, to 5.9% from 6.1% in August.
- The breakdown reveals that two of the CAP’s five components were responsible for the latest slowdown. Passenger traffic growth fell in September to 1.6% y/y from 4.0% in August, hitting a six-month low. This may be due in part to distortions caused by the shift in timing of Mid-Autumn Festival from September last year to October this year. But even in seasonally-adjusted 3m/3m annualised terms, growth slowed from 4.0% to 3.5% last month.
- Growth in domestic freight volumes also slowed in September in both y/y and annualised 3m/3m terms, with the latter hitting a three-month low.
- Property construction growth continued to rebound in September, reaching the fastest pace in almost three years despite the recent contraction in home sales.
CapEco's ominous conclusion:
Looking ahead, we think growth will continue to slow over the coming quarters. The current props to growth appear shaky. With investment contracting in real terms, industrial output will probably soften over the months ahead. Property sales also look set to weaken further as the government’s purchase curbs continue to expand. This will weigh on construction before long. More generally, with tighter monetary conditions weighing on credit growth, activity looks set to weaken further.
That the past 18 months of coordinated global growth will end in China, is quite symmetric: back in January 2016, as global markets were tumbling, aborting the Fed's plans to hike rates 4 times in 2016 and resulting in sharp economic slowdowns around the globe, it was the (still mysterious) Shanghai Accord that "saved" the world, and unleashed a burst of unprecedented, and coordinated, growth... which only cost China some $8 trillion in debt.
It will only make sense that another major Chinese event will mark the top of this economic mini cycle, and lead to the next global downturn, not to mention spike in market volatility.