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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