Xi Jinping's 'new normal' with Chinese characteristics
With growth slowing and policy options few, China's demand for resources will be limited
The world needs to get ready for a new normal with Chinese characteristics. Reacting to yet more evidence that China's growth is moderating quickly, President Xi Jinping more or less told us last weekend to get used to it.
"We must boost our confidence, adapt to the new normal condition based on the characteristics of China's economic growth in the current phase and stay cool-minded," Xinhua quoted Xi as saying.
What that means for China is not just slow growth, but slow growth complicated by a lot of debt, a hint of deflation, trouble brewing in the real-estate sector and very limited policy options.
What that means for the rest of the world is less demand for natural resources and even less reason to be optimistic about the prospect for more, well, normal labour markets and inflation.
The idea of the "new normal", popularised by Pimco, the US fund management firm, was that the after-effect of the overleveraging and subsequent financial crisis would be a long period of subpar growth, with all the ills and complications that implies.
And while China managed to kind of, sort of dodge that in the immediate aftermath of the crash, courtesy of massive stimulus and the resultant real-estate boom, its growth path is now decidedly on the downslope.
Trade has actually shrunk so far this year, and growth may well come in at 7.3 per cent for the year, which would be the slowest expansion in nearly a quarter of a century.
What is particularly interesting about all of this is, as ever, the way in which the huge role and power of the state in China both simplifies and complicates matters. Xi's ability to get things done quickly and decisively far exceeds that of his peers in the West, but he also may prove hamstrung by the fact that so much of what he might do involves state-controlled companies and sectors.
Take the most recent statistics on bank lending, which, while below expectations, still showed growth of 13.7 per cent. That would seem to suggest a strongly growing economy with ample, if decreasing, credit, but the reality is a bit more complicated.
For one thing, much of that credit is perforce funnelled to state-owned enterprises. Households and private enterprises account for only about a third of China's overall debt - equal to 230 per cent of gross domestic product - with state companies and off-balance-sheet borrowing for infrastructure by local governments accounting for about half.
Leverage in this quasi-state sector has actually increased in recent years, while households and private businesses have paid down debts. Therefore, the famously underproductive parts of the economy have been soaking up a disproportionate part of the available capital, in part because losses make this necessary.
In many ways, it is a funhouse mirror version of the somewhat unproductive and unsuccessful attempts in the US, to goose growth, except rather than choking banks with unwanted liquidity, China feeds state-sector enterprise with credit.
"Granting credit to profitless corporates is not too much different from having quantitative-easing liquidity trapped in the commercial banks' vault," Societe Generale economist Wei Yao wrote in a note to clients.
That perhaps explains why it's possible for China to have both quite low inflation, apart from food, alongside a still rapidly expanding supply of money and credit. The country has a massive oversupply of productive capacity, much of it in the hands of entities that don't make much of an attempt to maximise profits.
Low inflation, falling growth and large debts would normally call for easing by monetary authorities, but this is far from a sure thing. China wants to liberalise market interest rates, but that is a process that often comes along with credit bubbles. If market liberalisation is still a medium-term goal, the scope for easy interest rates is limited.
At the same time, China, like the United States last decade, is facing declining credit availability combined with a huge oversupply of real estate. While many view China's property sector as too big to fail, and liable to be rescued by official intervention, the risk of an uncontrolled reset of prices, while small, is real.
As in the US, many households have multiple properties, and a sharp decline in prices could be self-fulfilling, with developers and individuals trying to liquidate at the same time.
That isn't the central scenario. More likely is the new normal as promised by Xi: low growth and hard choices about reform.
The rest of the world may need to get used to living with far more limited Chinese demand.