• Our Gravity Index for China has made only a very modest recovery so far this year.
  • Parts of the domestic economy may be stronger but a GFC-like collapse in exports and probable rise in inventories is limiting growth. Moreover, household credit trends have continued to soften.
  • Corporate credit trends did strengthen in the early part of the year as the PBoC witnessed a sharp rise in its FOREX reserves. We believe that the PBoC will ease whenever the country’s balance of payments position allows.
  • However, China’s banks and companies owe a considerable amount to Western financial entities, and we cannot help but feel that the GFC-like contraction in Cross Border credit flows will be weighing heavily on China’s financial stability, its economy and its ability to grow. China will not help the World to avoid a second half recession.
  • The chart below, four months old though it may be (it is sourced from the BIS), seems noteworthy on many levels.
  • Global Cross Border Bank Lending

    % YoY BIS Data

  • We expect strains in global banking to result in a weaker RMB and continued weak growth (below target) in the PRC. We can also expect credit stress to re-emerge in those offshore financial centres that have acted as gateways for Western credit flows into the PRC.

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