China’s surprise data could spell recession

Against all expectation (not a single economist polled by Bloomberg had predicted it), the People’s Bank of China (PBOC) has cut interest rates. The ease was only by 10 basis points, to the bank’s one-year lending rate, but it was still in the exact opposite direction to the monetary route being taken in the west and in the rest of the emerging markets. And the PBOC would assuredly not have done this unless it felt compelled — which implies that the central bankers believe the Chinese economy is in a worse state than it appears. People were entitled to be surprised about this. Only last week, the People’s Daily, mouthpiece of the Communist Party, ran this piece that opened as follows:
“China’s central bank is expected to pay more attention to keeping inflation in check during the rest of the year while sustaining support for economic growth, experts said. Given the necessity of maintaining price and financial stability, the possibility of cutting policy interest rates in the coming months has declined.”
This wasn’t deliberate misinformation. Rather, we can take this as evidence that the decision was very finely balanced, and that there is disagreement among policy makers about what to do next. Like their counterparts at the Federal Reserve in the US, they may also have been data-dependent. The latest round of Chinese data might simply have left them with no choice but to ease.
That list, Gavekal contends, showed a faltering recovery that forced an easing. And the data were more than enough to cancel out any excitement over the easing. Chinese stocks quoted in Hong Kong rallied for the 40 minutes between the PBOC announcement and the release of the data, and then gave up all their gains. For the rest of the world, arguably the most critical Chinese data point is the volume of its imports. For years, it has been the world’s spender of last resort. But imports, measured in dollars, have tailed off, while exports are surging as the economy tries to get under way after Covid-19.
China’s appetite affects the rest of the global economy most directly through the prices of commodities, especially industrial metals. The main Chinese iron ore contract has suffered a massive fall since peaking in the middle of last year, while copper dropped sharply this year.
But China’s relationship to the rest of the emerging markets complex has shifted. At one point, Latin America — which produces much of China’s copper and iron ore — traded as though it was a direct play on the Chinese economy. Any gain for the copper price would buoy the region. That seems to be over.
This is part of a broader picture. China’s stock market detached from the rest of the emerging market complex with the onset of the pandemic, and has grown further apart ever since. Foreign investors’ visceral discomfort with China, driven primarily by political concerns but also by the problems for the Chinese economy, has now translated into making access to capital much harder for companies. It’s not long since problems for the Chinese economy were regarded as a positive for the rest of the world, because these would prompt another big credit-fueled stimulus. But without sufficient demand for credit, any monetary stimulus could be like pushing on a string.
Would a big fiscal stimulus on top of monetary easing do the job? That is what China produced in 2008. But since then, each successive bid to boost the economy with credit has been more muted than the one before it. Chinese authorities also have to contend with the ongoing fallout from the fall in property prices, which has continued unabated for almost a year, and the difficulties for property developers.

—Bloomberg