China elec Apr15

More and more evidence is emerging of the major slowdown now underway in China’s economy.

China’s leadership have warned this would take place since they took office 2 years ago.  And they have reinforced the message in recent months with their focus on explaining the move into the New Normal and its consequences.

A major interview last week in the Financial Times with Premier Li Keqiang confirmed the outlook:

“China’s turbocharged economy is growing at its slowest pace in a quarter of a century and is expected to slow further, the ruling Communist party is engaged in a sweeping anti-corruption purge and the country’s leaders are trying to clean up decades of rampant industrial pollution.”

Li was also quite clear about the problems that China sees with the West/Japan’s addiction to stimulus and Quantitative Easing (QE):

“Chinese leaders like to use metaphors in their speeches and Mr Li was most lyrical in explaining his concerns about quantitative easing and the US Federal Reserve’s plan to end unconventional monetary policy.

“It is quite easy for one to introduce QE policy, as it is little more than printing money,” he says. “When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.

“He warns that most countries have not yet undertaken the necessary structural reforms to address the root causes of the global financial crisis and compares the world economy to a patient on an “IV drip and antibiotics” who has not been allowed to strengthen their immune system to recover on their own.”

The chart above of one of Li’s favourite indicators for the economy confirms his message:

  • It shows electricity consumption in Q1 from 2008 onwards
  • Consumption fell 4% in 2009 after the crash, but then grew rapidly following China’s major stimulus programme
  • It jumped 24% in 2010, followed by 10% in 2011, 9% in 2012 and 4% in 2013
  • After the new leadership took over in March 2013, it grew 6% in 2014 and then just 1% this year

Other key indicators such as total social financing are also weak.   Lending fell 2% in January/February versus 2014, after a 5% fall during the whole of 2014.

Unsurprisingly, China therefore cut its reserve ratio yesterday, aiming to shore up the country’s banking system.  But it is clear this was not meant to be seen as a repeat of 2009′s massive stimulus.  Thus Li highlighted in his interview:

Since the fourth quarter of last year we have made fine-tuning adjustments to our fiscal and monetary policies but these adjustments are not a QE policy. Instead they are targeted regulatory steps and they have paid off.”

Of course, there are no guarantees that China’s New Normal policies will succeed in tackling the problems created during the ‘lost decade’ from 2003-2012.  As the BBC reported a year ago, the stimulus programme

Has now left the Chinese economy with huge debts and questions over whether much of the money can ever be paid back….it is now headed into the third wave of the global financial crisis which began in 2007/8 – the first wave was the Wall Street and City debacle of 2007-08; the second was the eurozone crisis.”

As Li warned China’s parliament last month:

This is not nail-clipping. This is like taking a knife to one’s own flesh.  But however painful it might be, we are determined to keep going until our job is done.”

The country simply has to take the pain of restructuring for the next couple of years, or instead risk suffering a ‘hard landing’ and possibly even economic collapse.