“The growth of the Chinese economy was quite robust in the second quarter with a plus of 1.3 percent, but will slow down noticeably in the third quarter.” This is what Axel D. Angermann writes, who, as the chief economist of the FERI Group, analyzes the economic and structural developments in all of the markets that are important for asset allocation.
“After the economy had returned to the pre-corona growth path at the end of 2020 and the economic consequences of the pandemic for China had thus been practically overcome,” reports Axel Angermann, “the Chinese leadership began to reduce the monetary and fiscal policy stimuli that they had previously used to overcome the crisis.”
Attention has shifted again to the containment of the enormous imbalances within the Chinese economy and in particular the excessive indebtedness. “An outward sign of the changed priorities was the, by Chinese standards, extremely unambitious requirement to strive for growth of more than 6 percent in the current year, which in view of the low level of the previous year could hardly be missed from the outset”, says Axel Angermann.
The consequences: the volume of loans granted in relation to GDP is again as low as it was at the end of 2018, when a similar economic policy regime prevailed, and significantly fewer government bonds than in the two previous years. “The purchasing managers’ indices are still above the important expansion threshold of 50 points, but have been falling since the beginning of the year”, warns Axel Angermann. “Industrial production growth has declined by several percentage points, while retail sales growth has remained at a low level. The trend in imports remained positive until recently. In contrast, exports stagnated at a high level, which again led to a lower trade surplus towards the pre-Corona level. As a result, consumption, investment and foreign trade already contributed less to overall economic growth in the second quarter than in the previous quarter. There is much to suggest that this development will continue in the third quarter and that overall economic expansion will be slowed down as a result.”
Positive impulses from China for the global economy are therefore not expected for the time being, which has an impact in particular on those countries that benefit to a considerable extent from exports to China, i.e. many emerging Asian countries and, in Europe, Germany in particular. “However, strong negative effects also appear unlikely: China’s leadership is well aware that their approach is a balancing act that harbors the risk of higher unemployment and social unrest. The stricter regulation of the private education system,” provides Axel Angermann an example, “is also likely to be due to the need to limit the financial burden on households for tutoring.”
He believes that the lowering of the minimum reserve ratios that the banks have to keep at the National Bank is more important: “This clearly sends the signal that they do not want to push ahead with reducing lending at any cost. There is therefore much to suggest that lending will stabilize at the lower level it has now reached. In the medium term, China’s economy would thus swivel on a course of moderate growth slightly below the 6 percent mark. The greatest risk remains that existing tensions with the US will result in a kind of cold economic war. An increasing decoupling of the two economic blocs from one another would not only jeopardize globalization, but also put Europe in an extremely difficult position.”
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