Fears of a global growth deceleration are largely fuelled by worries surrounding a Chinese domestic slowdown.
Rightly so, as China is not only the world’s second-largest economy but the largest economy by purchasing power parity and one of the world’s manufacturing powerhouses. Thus, shifting dynamics in China inevitably have a significant impact on the rest of the world.
This trend can be observed through China’s ‘credit impulse’, which measures the change in new credit issued as a percentage of GDP. It is considered a key driver of economic and investment growth in China, as well as a significant indicator for the global economy. Its fluctuations are correlated to – and often precede – economic changes in global markets.
Source: Bloomberg Intelligence
Now, with Chinese authorities reversing tightening efforts, the impulse is trending back up. In an attempt to stimulate the economy in the face of trade uncertainty, the government is cutting reserve requirements, encouraging lending and extending credit in certain targeted areas. In January, Chinese financial institutions issued 3.23trn yuan of new loans, versus an expected 3trn yuan – the largest monthly amount since 1992.
Pending the habitual lag which occurs before the credit impulse translates into economic growth, this could signal that impetus for the global growth deceleration is weakening.
The rise of a new hegemon
Beyond the direction of growth China and the rest of the world are taking, the most important takeaway for investors is what the credit impulse implies about China’s global stature. Its predictive value over the state of global growth reflects China’s rise in international prominence – and the waning influence of the US.
The growth gap between the US and the rest of the world is narrowing, as the US faces increasing headwinds. With an increasingly dovish Federal Reserve, there is diminishing support for the dollar, increasing the relative attraction of emerging markets.
The US-China trade war is further evidence of China’s ascension. It represents a vain attempt from the US to put a moat around its economic hegemony, which is under siege. Nevertheless, we believe China will increasingly become core to the global trade system – even if the US remains the centre of the global financial system – and this shifting political and economic power dynamic between the US and China will shape the investment landscape for decades to come.
This will likely force other countries and regions to choose sides, and the expectation is that trade tensions will escalate. Additionally, as President Trump’s domestic political agenda is being met with resistance by a divided Congress, he will likely have to revert to a foreign policy focus to demonstrate political success in the run-up to the 2020 presidential elections. Given past experience, we will likely see him play a hardball game before any concessions are made.
Moving with the tide
As a result of this potential multi-decade shift in the global investment landscape, we will have to be increasingly agile in our fund positioning. We are closely monitoring the Chinese credit impulse for further guidance, to inform our understanding of top-level macro dynamics and guide our asset allocation.
If the measure keeps trending up, we can expect EMs to be well-supported. Accordingly, we are overweight these markets, with a bias to Asia ex-India. The region remains cheap as a result of concerns emanating from Chinese growth and the trade war. However, we will await confirmation from the next data points before reviewing our stance on other risk assets.
Another likely outcome of growing trade tensions is that industries relying on a global supply chain, such as technology, may be vulnerable to disruptions. Therefore, we would caution against becoming too upbeat about future prospects, despite the re-rating in the latter part of 2018. Consequently, we are underweight US tech.