Japan may have its Abenomics, which is about reversing deflation and restarting growth using a shock and awe approach of qualitative and quantitative easing, simplified as a doubling its monetary base in a few short years, but that is old news. The latest -nomics is that of China and, as Barclays calls it, Li Keqiang's Likonomics which is about "about deceleration, deleveraging and improving growth quality."
Of course, since the deleveraging involved in credit-starved China will be measured in the trillions of yuan, we wish them all the best. Because as Barclays also adds, "The fate of both policies, however, will be determined by the success of structural reforms in each country."
Alas, if there is one thing the modern world has shown is that while implementing aggressive monetary policy is simple, following through with sustainable, fiscal and structural reforms has proven impossible (see Europe and the US). Maybe what failed everywhere else will work in Japan and China. But if it doesn't, things for China are about to get very ugly. So ugly that the hard landing scenarios of yesterday will seem like a walk in the park. From Barclays: "China could experience a temporary ‘hard landing’ (quarterly growth dropping to 3%) in the next three years." If that happens, all global growth (and stability bets) are off.
More from Barclays' Yiping Huang on China's epic upcoming (attempted) deleveraging episode:
Li Keqiang said at a State Council meeting recently that banks must make better use of existing credit and step up efforts to contain financial risks. Following implementation of the previous stimulus package, China’s total credit had increased from USD9trn in 2008 to USD23trn by early 2013. As a proportion of credit-to-GDP, the growth has been from 75% to 200%. According to Ken Rogoff and Carmen Reinhart, who investigated global experiences of financial crises during the past eight centuries in their bestselling book This Time Is Different, countries experiencing rapid credit expansion for extended periods always end up enduring a painful economic adjustment. What we think is more worrisome for China is the divergence in growth rates between credit (above 20%) and nominal GDP (below 10%) in recent quarters.
The PBoC’s recent move to curtail the credit bubble in the interbank market underlines the authorities’ desire to deleverage and reduce future financial risks. Their actions are a clear warning signal to financial institutions. While the authorities are likely to intervene to stabilise the market if needed, we think interbank rates could remain elevated for a long period. Policymakers probably also hope to strengthen market discipline as a preparatory step towards interest rate and capital account liberalisation. This implies that deleveraging is likely to continue and some of the smaller and weaker financial institutions may fail in the coming year.
China as the world's growth dynamo is no more:
The hard truth is that the days of 10% annual growth are over for China. Growth potential is now around 6-8%, we estimate. Of course, the government is not completely passive in this regard. Government-led infrastructure spending on energy, water and transportation has been accelerating since the beginning of 2012. But the scale is much more constrained compared with earlier programs. As long as the unemployment rate and CPI do not surprise, we would not expect the government to adopt any new stimulus measures to boost growth. The minimum acceptable growth rate has also shifted down, from 8% at the beginning of last year to 7% now. It could fall further in the coming years.
So what is the worst case scenario? Very bad.
In the short run, such rebalancing and deleveraging point to further downside risks for both economic growth and asset prices, including the exchange rate. Based on an increasingly likely downside scenario, we think Chinese growth could experience a temporary ‘hard landing’, which we would define as quarterly growth dropping to 3% or below, within the next three years.
There is a problem with this: as most know, the social stability GDP cut off floor is around 5.5 - 6.5%: anything below that, or the minimum growth rate required to preserve social cohesion and stability, and the riots begin. 3% growth means widespread looting, and millions of angry Chinese roaming the streets, an outcome that the Politburo will stop at all costs. Sadly, that is precisely what will likely happen, only for Beijing to tell the PBOC to drop its experiment at forced "capital reallocation" and unleash the credit spigots. Only in doing so it will epically overshoot to the upside, just as it did in 2011. The only question is when.