Chinese nominal USD-denominated imports dropped 14% in the three months to September year/year (and 14% in the six months to September year/year) – the median growth rate since the end of 2008 has been +6% year/year in both cases.

  • In short, Chinese import growth has been strong since the onset of the financial crisis in 2008/9, reflecting a period of exceptional local policy stimulus.

To put this in to context, the chart below shows the proportion of the growth in world merchandise trade accounted for by various countries/regions since 2008:

  • China, an economy of approximately $10 trillion – about 12% of Global GDP – accounts for 32% of the growth in goods imports over the five years from 2008 – 13. China has been punching well above its weight.
  • The Asia region as a whole, so dependent on China, accounts for almost 70% of the growth in global Imports.
  • China and Asia accounted for 54% and 27% of the growth in exports over the same period.

2015.13.10.WhyChinareallymatters

Why is this so important? Well, the following chart shows domestic demand growth in the major regions/countries on a rolling five year annualised basis:

  • Real domestic demand growth barely hit 2% annualised at its peak over the period in Japan, the UK and the US and has not grown at all in the Eurozone.
  • When you have little or no demand growth you rely on foreign demand; in the case of the developed economies you rely on Chinese import demand to hold global growth up.

2015.13.10.WhyChinareallymatters2

Collapsing import demand, as we have argued previously, is reflective of an alarming slowdown in Chinese manufacturing sector investment growth (as Chinese companies race to bring capacity growth more in line with the rate of growth in demand in the West):

2015.13.10.WhyChinareallymatters3

This is not a cyclical but a structural adjustment – weak global growth, disinflation/deflation follow.

With the exhaustion of the effects of monetary policy, how long will it be before we hear arguments of the kind below from policymakers?

  • “look, government bond yields are near record low levels, we can borrow for ten years at rates of 2% or less (or thirty years at negligible rates), I think we should be issuing lots more debt to take advantage and invest that money in real, tangible things (like infrastructure) where surely we can find some projects with long run returns above the nominal/real cost of borrowing.”

Or

  • “Bond yields are so low, let’s borrow money, build a ‘National Recovery Fund’ and invest all the proceeds in the equity market directly, the risk premium is positive and surely equity returns will exceed bond returns over the next ten to thirty years.”

 

MONOGRAM CAPITAL MANAGEMENT