Aura Global Insights – Issue No. 19
CHINA: THE BAD AND THE GOOD
Chinese trade remains weak and a headwind to global growth, but credit conditions continue to ease.
The credit numbers released this week show a ray of hope. Adjusted total social financing growth continues to improve as monthly credit creation is robust, hitting CNY2.26 trillion in June (versus analyst expectations of CNY1.9 trillion). Crucially, credit growth is driven by mortgages and local government bonds, which result in actual spending, unlike short-term loans.
The outlook for credit growth is also positive. The impact of previous cuts in the reserve requirement ratio will continue to support growth. Moreover, recent comments by Chinese officials suggest that the Chinese central bank will use the current wave of global monetary easing to cut rates – sending a strong signal that Chinese policy may remain easy for the next nine to 12 months.
Finally, local government bond issuance should pick up further. Q3 coincides with the new provincial budgets and is historically a period of strong bond issuance. Beijing is easing budget and issuance rules, which may feed those dynamics.
Bottom Line: Chinese activity may remain soft over the coming months, and Q2 growth numbers are likely to be very weak. However, the previous pick up in credit is likely to gather steam and support Chinese growth conditions in the tail end of the year and early next year. The Chinese drag on the world may be progressively receding.
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