It’s Not Working! Charting China’s Loosening Policy Path


Since June 2018, China has been loosening monetary and fiscal policies in an attempt to refloat the sinking red ponzi amid the shadow banking system’s deflation.

As the following chart from Goldman Sachs shows, it is not working as the Current Activity Indicator continues to slump…

It seems no matter what China throws at it, the economy (or the market) won’t behave as the text-books say it should. The crackdown on the shadow-banking system is hard to overcome it seems with even the most finely tuned hammer of monetary policy…


As Goldman’s Andrew Tilton (Chief Asia Economist) suggests:

“…two challenges brought us here.

Internally, policymakers’ efforts to constrain the growth of shadow banking and reduce financial risks worked almost too well. Financial regulations introduced in 2017 and early 2018 led to a meaningful contraction in shadow banking, which slowed overall credit growth and tightened credit conditions, particularly for private companies.

And externally, the escalation in US tariffs raised questions about China’s export growth and damaged confidence in the economic outlook. As a result, our China Current Activity Indicator (CAI) has fallen nearly two percentage points from its 1H2018 average of over 7%.”

On the policy side, he remains optimistic…

“I do think policymakers have a better understanding of the macro problems and risks today. They also have a greater appreciation for the side effects of policy stimulus, which seems to have made them less willing to ease aggressively. They don’t want to do more than necessary to support growth.”


There are reasons to be concerned [that easing is becoming less effective]. Local government officials who typically implement infrastructure spending and other forms of stimulus are facing conflicting pressures. The emphasis in recent years on reducing off-balance-sheet borrowing, selecting only higher-value projects, and eliminating corruption has made local officials more cautious. But at the same time, the authorities are now encouraging local officials to do more to support growth, like accelerate infrastructure projects. President Xi himself recently acknowledged the incentive problems and administrative burdens facing local officials.”

And while the short-term does not look good, Tilton is hopeful for H2 2019…

Growth is likely to slow a bit further, given that the credit cycle is still a drag and stimulus is ramping up relatively slowly. Chinese exports have also benefited from some frontloading, given that until recently it looked like US tariffs might increase in January; the payback for that in early 2019 will likely shave as much as 20bp off of GDP growth. Nonetheless, we expect growth to firm up in the second half of next year. Remember that China’s GDP growth is not only a measure of economic performance, but also a formal target that matters for credibility. “

But we give the final word to Evan Medeiros, former Senior Director for Asian Affairs at the National Security Council, who is more skeptical of any return to normal any time soon…

“We should expect a ‘new normal’ of persistent and consistent [US-China] tensions. Although cooperation between the two countries will continue, it will be difficult, episodic, and limited to big global questions.”

Key to either scenario will be China’s willingness to compromise. For his part, Medeiros thinks China is prepared to make enough changes to its trade and investment practices to avoid a trade war, largely because of its domestic economic challenges. But he cautions that Xi Jinping – whom he spent time with as an advisor to President Obama – is confident enough to tolerate more friction in US-China relations than his predecessors. And if the trade conflict worsens, Medeiros thinks US companies will find themselves hamstrung in China, with other foreign competitors reaping the benefits.

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