The PBoC’s policy tightening appears to be aimed at stabilising the renminbi. However, a small number of rate hikes now can also accelerate the shakeout in ‘zombie’ companies and ensure the current recovery endures. This is an opportune moment: the Government is politically strong, and the economy is on a more stable footing compared to one year ago. The NBS consumer confidence index rose again in February, and reached its highest level since December 2007.
The journey will not be smooth. The threat of a liquidity crisis in Chinese banks appears to be rising. Issuance of negotiable certificates of deposits (NCDs) has jumped. Total credit outstanding to the private non-financial sector hit 209.5% of GDP in Q3 and is fast approaching Japan’s peak in the early 1990s (219.5%, Q4 1993).
However, when the bubble burst in Japan, domestic demand slowed because there were no alternative sources of growth. By contrast, Chinese tech companies are at the frontiers of global innovation. Companies such as Tencent and Alibaba are stimulating demand both domestically and abroad. Investors should not lose sight of these deep underlying trends.
Summary
- China quickly assuming pole position in technology
- This is highly stimulative for emerging markets
- It will also help to underpin domestic demand in case of short-term market dislocations
