China: Do The Maths On 2014 GDP Growth

ChinalendingH22014

By John Richardson

DO the maths and you should be able to assess what could happen to China’s GDP growth in 2014:

  • The Chinese Academy of Social Sciences wrote last week in the China Daily: If the PBOC loosens monetary policy to push down borrowing rates, it will have to achieve total social financing – a broad measure of liquidity – of more than Rmb 19 trillion ($3.14 trillion) to support GDP growth of 7.5%. But that amount of total social financing would represent 12% year-on-year expansion, much faster than last year’s gain of 9%.  An increase of that scale will cause massive macroeconomic risk, because non-performing loans will pile up faster and the goal of reducing the economy’s reliance on credit-fuelled expansion will recede even further into the distance.  To have more sustained and quality growth, we’ve got to let the growth rate go down. In other words, you have to pump ever-more air into the bubble just to keep it at the same level of inflation. Reduce the air supply – or even maintain the air at its previous level – and growth, potentially, falls of a cliff. 
  • But the FT’s Beyondbrics blog  estimates that credit growth could be as low as just 5% in 2014 (if the trend turns out to be your friend this would continue the deceleration in lending that occurred H2 last year – see the above chart).
  • The People’s Bank of China is giving every indication that it wants to crack down on speculation in 2014 and, thus, reduce credit creation.

Every chemicals and other company must, therefore, factor in the distinct possibility of GDP growth much lower than any of the current consensus forecasts.

How low? As we said, the maths has to be done based on the assumptions above and will lead to estimates a lot lower than the 6-7% being forecast by several polyolefins producers.

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