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Graph of the week

Graph of the week

18-04-2019 | Insight

The end of Chinese deleveraging

  • Léon  Cornelissen
    Chief Economist

Source: Thomson Reuters Datastream

Since 2016, Chinese policymakers have been concerned about the growth of Chinese debt ratios. After all, the growth of that debt has been even higher than the already substantial growth in nominal Gross Domestic Product. This deleveraging of the Chinese economy was directly visible in the numbers for net total social financing, a broad measure of lending levels and liquidity in the Chinese economy. 

However, since the beginning of this year, the floodgates have been opened yet again and it is clear that the priority of Chinese policymakers is once again growth. It seems that a new credit cycle in China has started. Chinese policymakers have been occupied for some time stimulating the economy along a broad front. This includes tax reductions, giving local authorities the green light for investments in infrastructure projects, and lowering the reserve obligations for the banking industry in several steps. 

A new reduction is expected soon, although the central bank (PBoC) is reportedly still resisting this somewhat. It is of course familiar with the exuberant credit-growth numbers and afraid of ‘overkill’. Nevertheless, the reduction is coming, as we shouldn't harbor any illusions as to the independence of the PBoC.

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Great quarter on the markets

The Chinese stimulus policy has been successful insofar as the growth numbers in the first quarter were stable at 6.4%, providing economists with a positive surprise. Industrial production increased sharply in March. We should note here though that the Chinese new year celebrations fell in early February this year, and a rebound in March is therefore to be expected.  But even retail sales were better than expected in the first quarter. 

The tax cut played a key role here, as it ensures that the stimulus primarily ends up in China itself and leads to higher levels of profitability for Chinese companies. The Chinese market has thus had a great first quarter, and is rising even further in April. 

Another important factor is increasing optimism regarding a ‘trade deal’ between China and the US. The contours of such a deal are now clear. China will import more US goods and will refrain from a competitive devaluation of the yuan. New rules will be implemented regarding the transfer of technological know-how by US companies in China, and access to the Chinese market for US companies will be eased. 


China may allow concessions when it comes to the sale of personal data. The country may also tighten protections for intellectual property and limit subsidies to key businesses. The parties are further squabbling about creating a mechanism to enforce compliance with the agreements made. The US even wants to go so far as to prevent China from taking any retaliatory measures (import duties on US products, complaints to the WTO) if the US unilaterally declares that China is in breach of its agreements. 

It seems to us that the US is asking too much on this point, and we think it extremely unlikely that China would accept such a far-reaching limitation of its sovereignty. China would rather see all the import duties imposed last July vanish immediately, but the US wants to keep up the pressure on China, preferring a more gradual approach. 

An agreement still seems the most likely outcome, partly due to the fact that successful negotiations would be a boost to President Trump's 2020 re-election campaign. It is improbable that the US and China will settle their mutual disputes in one go. In that sense, it is more a truce than a peace treaty, but for the time being that's still good news for both the Chinese and the global economy.

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