But such a happy outcome depends on how harsh China’s slowdown and how long the mini-crisis lasts. Right now, the credit impulse is contracting at a rate equivalent to 7% of GDP, and we have the unusual spectacle of a Chinese economy that is barely growing 5%, slower than the United States. United States, United Kingdom or France. “The debt reduction campaign is in full swing,” said Wei Yao of Societe Generale.
Retail sales have never really recovered (unlike Anglo-sphere), services are still soggy, and construction growth has slowed to near zero. Once untouchable, state enterprises or public enterprises were forced to go bankrupt to cleanse the system of endemic moral hazard. Fiscal policy is tightened by 1.5% of GDP.
It’s Liu He’s rigorous and disciplined love, the bane of China’s bubble economy, and it’s hard to reconcile his medicine with talks about a new commodity supercycle in New York and London.
China is, after all, the world’s buyer of last resort for industrial metals and coal. It consumes 50% of the iron ore supply, half of which feeds the Chinese real estate industry – now on a low-calorie diet. “The prices of raw materials are highly exposed to a major reversal,” says Société Générale.
What is striking is that Liu continues to tighten the tap even though China is already close to structural deflation. Headline inflation is only 0.9% and the key rate is even lower.