Several weeks ago, the People’s Bank of China (PBOC) said it would “increase counter-cyclical adjustments” to prevent downward pressure on the economy. Now the PBOC is warning that it might not be able to ward off these downward pressures in the short term, reported Reuters.
The PBOC’s annual financial stability report said China would continue to deploy fiscal and monetary policies to support the economy but warned economic deceleration would continue through year-end.
Policy maneuvering by the PBOC will be limited as it will likely need to cut rates and the amount of money banks put down as reserves to promote credit growth.
The PBOC recognizes the rapid deterioration in the economy, along with the limitations of monetary policy to revive growth.
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Likely, credit creation via the PBOC won’t be in magnitude seen in the last ten years used to save the world from escaping several deflationary crashes.
The government will likely stabilize its economy or at least create a softer landing through tax cuts and infrastructure spending, the annual report said.
What this all means is that China’s economy isn’t going to save the world as it has done since 2008. China’s credit impulse has rolled over, the probabilities of a massive global economic rebound in the coming quarters are unlikely as China continues slow.
Fathom Consulting’s China Momentum Indicator 2.0 (CMI 2.0) provides a more in-depth view of China’s economic deceleration through alternative data as there’s no evidence at the moment that would suggest a trough in China’s economy.
China’s economy over the last decade has created 60% of all new global debt. This means with China’s economy in freefall, the PBOC powerless over downside, GDP will likely fall to the 5-handle in early 2020. More importantly, this means a global economic rebound of massive proportions is unlikely to happen early next year.