Bloomberg columnist Daniel Moss argue that China can continue to maintain economic growth amidst a sharp tightening of credit because of the rising prominence of the services sector and domestic consumption.
China’s financial regulators launched a heavy-handed deleveraging campaign over a year ago in in order to deal with the mountain of debt accumulated since the Great Financial Crisis.
Beijing has indicated that the deleveraging campaign will continue unabated in 2018, flagging a focus on the state-owned enterprise sector and local government debt, as well as heavier scrutiny of the lending practices of commercial banks.
While the clampdown on credit has created concerns about the potential impact on economic growth, particularly given the extent of dependence upon debt financing, Bloomberg columnist Daniel Moss says that China is capable of both deleveraging and maintaining growth levels simultaneously.
“The key to threading the needle between deleveraging and growth lies in a huge change in the nature of China’s economy,” writes Moss.”That is the increasing dominance of services and consumption, which now account for the bulk of gross domestic product.
“The real story the past few years has been that manufacturing…accounts for a diminishing chunk of what’s become the world’s second-largest economy.”
Moss points out that these areas enjoy the double advantages of growing more rapidly than traditional industries, while being far less credit-intensive.
The rise of the services sector and consumption as well as the receding of the more lending-dependent manufacturing sector has paved the way for a shift in Chinese credit dynamics.
Figures from JPMorgan Chase &Co. indicate that credit growth in the Chinese economy eased to around 12% in 2017, from over 16% in 2016.
According to JPMorgan this decline is mainly associated with the Chinese manufacturing sector, as the services sector is less sensitive to shifting credit availability.
“The good news for China and the world is that the fastest-growing part of the economy will be relatively immune from efforts to tape the brakes,” writes Moss.
For this reason Moss expects Beijing’s deleveraging campaign to only generate positives for the Chinese economy, serving to enhance financial stability, dramatically reduce the likelihood of a banking crisis, as well as expediting reforms of the country’s inefficient state-owned enterprise sector.