Why everything is not all right with Chinese Economy
China’s economy is gaining a bit of steam. But that just increases the pressure to slow things down again
China’s official manufacturing purchasing managers index hit its highest reading in over two years in October to 51.2, from 50.4 in September. (Readings above 50 indicate expansion.) A separate private survey by Caixin Media and data provider Markit showed similar results. Both surveys are further evidence that after two years of easing, the economy is finally responding.
Good news should be good news, if only China’s economy were self-sustaining and grew without the drip of cheap credit. Over the past half-decade, however, whenever easing ebbs, so does economic activity. That can be partly explained by the increasing credit intensity of the economy.
It takes more and more debt to deliver an equivalent amount of growth. In the first half of the year, it took 70 yuan of new debt to generate 100 yuan worth of gross fixed capital formation, notes Louis Kuijs of Oxford Economics. It was 62 yuan in 2015 and 44 yuan in the middle of last decade.
And it looks increasingly like the credit drip is ebbing. The Communist Party’s top organ this week warned about asset bubbles, saying harnessing them was now a goal of monetary policy.
The People’s Bank of China recently tightened the noose on popular off-balance sheet bank lending. And it has tightened liquidity in the interbank market in recent weeks, a key source of funding for banks and wealth-management products. That can be seen in a tick up in rates for overnight money to 2.25 % this week, after averaging 2 % in the year through September.
Elsewhere, a crackdown on credit is becoming increasingly pervasive, with regulators telling banks to curb property lending. More than 20 cities put curbs on home buying in October.
China’s latest dose of relief is only a temporary condition.