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at 10:00 am on July 1, 2021 | 0 comments
China’s credit impulse is not dead so far as commodity prices are concerned. But in terms of structural changes I agree with TSLombard that the US will be the engine and China the caboose in the cycle to come:
There was a time when China’s credit impulse was the most important piece of data in global macro. For almost a decade, the country has been locked in a stop-go policy pattern, with every oscillation in China’sdomestic monetary/fiscal stance eventually producing powerful swings in the broader global industrial cycle. To be precise, if China tightened, the world could expect a deflation scare, typically around8-10 months later. If the authorities eased, “reflation” would become the big theme. The problem with this correlation is that nobody understood why it had become so compelling–it seemed to go far beyond traditional trade links, including China’s role as a source of final demand. When we investigated this topic a few years back, we put it down to“indirect” linkages, including via investor sentiment, financial channels (e.g. global equity exposure) and capex. But perhaps there was a simpler story–with the developed economies suffering secular stagnation and central banks powerless to stimulate demand, China had become the world’s main source of “balance sheet”. By adding 30% of world GDP to the CCP balance sheet, the country had become the marginal source of demand for the entire global economy. But this leaves a problem–because China no longer wants to play this role.