By John Richardson
YOU will be in the airport bookshop in a couple of years’ time, staring at shelf after shelf of books about why everyone should have seen this latest global economic recession/crisis coming.
What everyone will agree on, in fine rear-view mirror fashion, will be that China was the trigger for financial contagion. “We should have known better” will be the theme running through all of these books, as comparisons are drawn with the bursting of the dotcom bubble and the Global Financial Crisis which followed the end of the US sub-prime mania.
We flagged up the critical turning point in China in November 2013. The people who believed us back then should now be in a reasonably good position to deal with today’s rapidly unfolding events that are quite neatly summarised in this Daily Telegraph article. This will save them some money when they are browsing through airport bookshops in a couple of years’ time.
How have we known for so long that China would be the trigger? It is actually incredibly simple. Just look at the lending data. The chart at the beginning of this blog post shows changes since 2008 in China’s official and shadow lending, which together constitute China’s total social financing (TSF).
•Phase 1, 2009. TSF lending doubled to $20tn, after President Hu and Premier Wen pressed the panic button in response to China’s loss of exports following the start of the financial crisis.
•Phase 2, 2010–2013. After stabilising in 2010–2011, lending soared again to peak at $28tn in 2013 as the shadow sector went out of control. By 2013, it was $11tn higher than in 2008 and equal to official lending at $14tn a year.
•Phase 3, 2013 onwards. President Xi Jinping’s appointment in March 2013 changed everything. Shadow lending has since more than halved to $6tn, while TSF lending is down $4tn – despite an expansion in official lending to maintain banking sector liquidity.
And we also know that it is simply impossible for China to turn this around in a hurry. Its transformation from an investment to a consumer-led economy is going be a long and difficult process. There is also a scenario that you must consider where the transformation fails.
The great news for chemicals companies, whether or not they saw today’s crisis new global economic crisis coming, is that the opportunities for future growth are fantastic. But you can only tap into these opportunities if you throw the old accepted wisdom out the window and start again.