Three Big Questions and the Most Important Chart by Tao Wang
Market consensus expects China to grow by about 7.5% in 2014, with
reforms picking up the pace in many areas. Behind this "average" view,
there are some big questions about China's macro policy and outlook in
2014 and significant unease in the market. The three big China questions
on everyone's minds are: (1) Will China bring excess credit growth,
especially shadow credit expansion, under control? (2) Will local
government debt be tightly controlled and seriously dealt with? And (3)
Will liquidity squeezes and rate spikes in the interbank market result
in serious credit tightening and slower GDP growth?
Our base case is that the government will pursue a slightly more prudent
monetary policy and will better regulate the shadow credit market in
2014, slowing the pace of leverage but refraining from outright
deleverage; local government debt will be put on a more sustainable and
transparent path but will continue to grow; periodic liquidity squeezes
and rate spikes will likely persist but the negative impact on overall
growth should be limited, as we expect overall credit to expand by a
still rapid 15-16% in 2014. As such, we only expect a modest slowdown in
domestic investment, which should be more than offset by stronger export
and domestic consumption growth. Our 2014 GDP growth forecast remains at
7.8%, slightly higher than in 2013.
Of course, we expect debates and concerns related to the big credit/debt
issues to continue through this year. Not only do market economists and
investors hold divergent views, but China's government experts and
officials differ in their opinions too and may send conflicting signals
to the market at times. For China observers and investors, how do we get
to the true answers to the big questions? How can we monitor the actual
development?
A year ago, we said the following chart is the most important one on
China, highlighting non-loan credit's rapid and volatile growth. In
seeking answers to the above big questions, we still think this is the
single most important chart.
Market consensus expects China to grow by about 7.5% in 2014, with
reforms picking up the pace in many areas. Behind this "average" view,
there are some big questions about China's macro policy and outlook in
2014 and significant unease in the market. The three big China questions
on everyone's minds are: (1) Will China bring excess credit growth,
especially shadow credit expansion, under control? (2) Will local
government debt be tightly controlled and seriously dealt with? And (3)
Will liquidity squeezes and rate spikes in the interbank market result
in serious credit tightening and slower GDP growth?
Our base case is that the government will pursue a slightly more prudent
monetary policy and will better regulate the shadow credit market in
2014, slowing the pace of leverage but refraining from outright
deleverage; local government debt will be put on a more sustainable and
transparent path but will continue to grow; periodic liquidity squeezes
and rate spikes will likely persist but the negative impact on overall
growth should be limited, as we expect overall credit to expand by a
still rapid 15-16% in 2014. As such, we only expect a modest slowdown in
domestic investment, which should be more than offset by stronger export
and domestic consumption growth. Our 2014 GDP growth forecast remains at
7.8%, slightly higher than in 2013.
Of course, we expect debates and concerns related to the big credit/debt
issues to continue through this year. Not only do market economists and
investors hold divergent views, but China's government experts and
officials differ in their opinions too and may send conflicting signals
to the market at times. For China observers and investors, how do we get
to the true answers to the big questions? How can we monitor the actual
development?
A year ago, we said the following chart is the most important one on
China, highlighting non-loan credit's rapid and volatile growth. In
seeking answers to the above big questions, we still think this is the
single most important chart.