Saturday, January 25, 2014

Reflections on the current state of the Chinese economy

The moderation in Chinese economic growth in September was not a blip. That is confirmed by the December macro-economic data now available.

As retail sales and manufacturing investments remained stable, the main reason for the continuing slowdown appears to be less infrastructure investment and (more worryingly) slower export growth.

Further, since November, liquidity has been tight, and credit growth is expected to slow further in 2014.

So the PBoC was forced to inject funds into the market ahead of Chinese New Year.

Money market rates may therefore calm down next month, though financial reforms and the PBOC's bias towards tightening will probably mean volatile interbank rates - volatility may be great for day traders but is also not good for the economy as a whole.

And more regulations on shadow banking are expected in 2014; there may or may not be a major crackdown, but there could be an improvement in regulatory supervision - at least I hope so.

Meanwhile, the risk of defaults in shadow banking has risen, and I fear that there may be systemic risk.

What all that means is that the slowdown (possibly catastrophic) that I had expected to hit the Chinese economy last year, only started hitting it last year, and its full impact is going to start being felt this year.

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