China’s Credit Hiccup Is No Reason to Get Nervous

A dip in Chinese lending data sent investors scrambling to discern a broader meaning. A closer look shows there little reason to panic.

China’s aggregate financing and new loan growth data fell in October to the lowest in a year, raising concern that economic growth will decelerate as President Xi Jinping shifts his focus to containing financial risks after stoking output in the runup to last month’s 19th Party Congress.

While the data came at a time when global investors have shown increasing anxiety that global growth won’t justify elevated asset valuations, seasonal and technical factors make the numbers difficult to interpret.

The lending slump was partly caused by government-ordered production cuts at factories so the air around Beijing wouldn’t be polluted for the Party Congress, according to Bloomberg Intelligence. And calendar timing played a role, according to Goldman Sachs Group Inc., with this year’s mid-Autumn Festival holiday falling in October as opposed to September. Adjusted for that, broad credit flowing to the real economy was a “touch higher” than in September and remained at a level supportive of growth, the bank’s economists wrote in a note to clients Monday.

Market moves were largely muted, with assets sensitive to China’s growth prospects holding up well Monday. Still, the credit slowdown brought a reminder of how reliant markets from copper to the South Korean won and Aussie dollar can be on the world’s second-largest economy. Recall 2015’s unexpected devaluation of the yuan and the ensuing selloff in risk assets around the world.

Here, too, there’s reason for optimism. The global economy is showing synchronized growth at levels last seen more than a decade ago, and China’s contribution is waning. Since mid-2016, China’s added around one-sixth of the total, less than the one-third it contributed in prior years, according to Gavyn Davies, chairman and co-founder of Fulcrum Asset Management LLP.

What’s more, a moderation in growth isn’t exactly unexpected after a surge in lending pushed the economy higher at a rate faster than the government’s target for the year. Data this week will show that industrial production slowed to 6.3 percent in October from 6.6 percent in September, while retail sales picked up to 10.5 percent from 10.3 percent, according to economists surveyed by Bloomberg.
Source: Bloomberg