The operator of the world’s largest options and futures exchange expects China’s economic growth to ease considerably over the next two years given current yield curves.
Erik Norland, Executive Director and Senior Economist of the Chicago Mercantile Exchange & Chicago Board of Trade (CME Group), said in an interview with Caixin that the yield curve in tandem with high debt levels presages a slowdown in Chinese economic growth in a year’s time.
Norland expects China’s GDP to remain between 6.7 to 6.9% for 2017, yet sees it potentially falling to 6% in 2018, before declining further to between 4.5% and 5% by the 2019 – 2020 period.
Norland said China’s three year to ten year yield curve had already started to flatten in 2013, and that the country’s GDP growth has shown a strong tendency to lag the yield curve by between four and five quarters.
Based on the current yield curve, this would point to a high likelihood of economic slowdown starting in around a year’s time.
High debt levels are also another factor presaging an imminent slowdown in China’s economic growth.
Norland notes that the economic deleveraging that China’s policymakers are currently pursuing is an extremely difficult task, as proven by the recent economic histories of US, Europe and Japan, all of whom have struggled to tamp down debt levels.
Simply writing off debt is one effective method, but would also have an adverse impact upon the asset side of bank balance sheets, while reducing the debt-GDP ratio by keeping economic growth above debt gains will be difficult to achieve.
Norland instead expects China to follow the lead of Japan, who resorted to low interest rates to reduce debt ratios.
He points out that if banks provide short-term loans at rates equal to or higher than long-term rates, it will be very hard to maintain credit growth, and massive credit expansion remains a key prop for China’s economic growth.
While an extremely flat yield curve can help contain risk associated with lending by banks, it can also act as a drag on the economy.
Another potential risk for the Chinese economy highlighted by Norland is US trade protectionism under the Trump administration.
Norland only expects symbolic gestures from the US government and minimal negative impacts, however, given the adverse ramifications for American vehicle manufacturers of the anti-dumping investigations launched against Japanese and Chinese steelmakers during the Bush Jr. presidency.