Here’s why global reflation trade can survive China’s credit slowdown

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Could a tightening of China’s credit taps end the reflation of global trade on global stock markets this year as the world economy recovers from the coronavirus pandemic? Although past slowdowns in Chinese lending have caused market volatility, some argue that this time it will be different, as US fiscal largesse may be replacing China as the engine of global growth for the first time in two decades.

The International Monetary Fund predicted the same in its latest forecast, estimating that the US economy will expand 6.4% in 2021. In recent months, investors have worried that China’s efforts to eliminate excesses and stabilizing its financial system could paralyze the global recovery. The “credit boost,” which tracks loan growth as a percentage of GDP, has fallen below zero in recent months as Beijing officials sought to curb lending to avoid destabilizing excesses that could overheat the US economy. China. “You are seeing a lot of interesting snippets among policy makers in China,” said Michael Arno, associate portfolio manager at Brandywine Global. “There are continuous discussions about the leverage of the real estate market. These are all indications that, in my opinion, this is very coordinated. ”Total outstanding social finance (TSF) growth, a broad measure of credit in the economy, slowed to 12.3% in March from 13.3 % in February. Arno says credit boost has historically tracked iron ore and copper prices, and indicators of global manufacturing activity. However, recent supply shortages and the adoption of electric cars have helped offset the decline in loan growth. But fiscal stimulus programs implemented by Western politicians, led by the United States, could offset the impact of China’s credit slump. the rest of the major economies have now joined in. This would normally be a worrying sign, but we don’t think it is now, “said Tamara Basic Vasiljev, senior economist at Oxford Economics. He noted that direct payments to homes and businesses by the US government are driving savings in the private sector, “making credit less necessary,” Vasiljev said. Still, there are many investors who worry that the sharp decline in credit growth from China’s commodity-hungry economy could cripple global trade and manufacturing, even if the broader damage to the performance of risk assets were more difficult to determine. “Depending on how you measure it, China is the world’s largest economy and the largest trading partner in most emerging markets. What happens in China is very important for other emerging markets, “said David Loevinger, analyst at TCW Group. See: Investors fear global markets are vulnerable to China’s credit crunch. Friday was a prime example of investor sensitivity to any signs of slowing growth in China. After China’s official manufacturing purchasing managers index fell to 51.1 in April from 51.9 in March, global stocks plunged. China’s CSI 300 Index 000300, -0.79% closed down 0.8% on Friday and Europe’s benchmark Stoxx Europe 600 Index fell 0.3%. In the US, the S&P 500 SPX, -0.64% traded lower at the end of the week, albeit after closing at a record high on Thursday.