Economists are scratching their heads over China, where production is increasing even as wage and hiring growth are incongruously stagnant.
Many "old economy" firms in the commodities sector experienced an increase in production capacity, while the once-booming retail sector has been on a downward spiral with decreased revenues and demand, leading to a spiraling decrease in hiring and weakening cash flows.
Some think this may be the beginning of a slowdown, particularly in light of the excessive debt risks present in China's economy.
This past year has been significantly prosperous for the Communist-led country, with the government pouring millions into infrastructure, inducing a construction boom. But it may be time for what was up to come down.
"I think it's very clear, and I think the leadership knows this. They have this very difficult problem of balancing financial risk - which is too much credit growth - against economic growth," said Fraser Howie, independent analyst. "It's a problem of their own making. For too long, they allowed credit to expand. For too long, they focused on GDP growth rate." This expansion of credit is why Beijing is considering cutting money supply, leading to decreased aggregate demand.
A big factor that is contributing to the prospective slowdown is high levels of debt not at the top, but instead at the local level, in the form of doctored provincial economic reports. Local governments are judged based on their fiscal performance and so many local authorities are incentivized to either achieve desirable results through doctoring, or by borrowing money, which leads to increased debt.
Total social financing (TSF), a broad measure of credit and liquidity in the economy, rose to 1.6 trillion yuan ($244 billion) in November, from 1.04 trillion yuan a month earlier.
Another contributing factor is that the 19th Communist Party Congress is now over. The Congress was a big incentive to maintain economic stability in China, but since it has passed, the economy is more prone to risks, as the government is not so concerned about pumping money into it anymore.
"With the 19th Party Congress now behind us, the risk is that the peak growth in China is also behind us," David Woo, head of global rates, FX and EM FI strategy & econ research at Bank of America, said in an outlook report. "Curiously, the market has been ignoring the string of negative Chinese data surprises in recent weeks. It is possible that the market views them as temporary. We are concerned that China could be vulnerable to U.S. tax reform getting done," Woo said, drawing upon the fact that a weakening Chinese yuan would cause capital outflows from China. If that happens, China's central bank would be likely "to tighten liquidity, which in turn would raise further concerns about the growth outlook," Yooadded.
While the extent of the slowdown is hard to predict, one thing is clear: money supply cuts are definitely on the horizon. Last week, Beijing concluded its Central Economic Work Conference that depicts plans for 2018. The government subsequently said in a statement that, "Prudent monetary policy should be kept neutral, the floodgates of monetary supply should be controlled, and credit and social financing should see reasonable growth."
- https://www.reuters.com/article/us-china-economy-beigebook/china-fourth-quarter-economic-trends-point-to-slowdown-in-2018-beige-book-survey-idUSKBN1EK1HN
- https://www.cnbc.com/2017/12/28/china-debt-vs-china-growth-beijing-faces-big-questions-in-2018.html
- https://www.cnbc.com/2017/12/28/china-may-be-a-bigger-worry-for-2018-analysts-say.html
